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Gary Shilling Sees An Unsafe Buildup Of Risks (Bloomberg View)
In a low interest rate environment, Gary Shilling says he sees a build up of risk and leverage as investors seek yield.
“I see lots of potentially unsafe buildups. Consider the rush into junk bonds, depressing their yields and spreads versus Treasuries. So much money has poured into below-investment grade debt that it now takes real skill to default. So great is the investor appetite for yield that 46 per cent of junk bonds are selling at or above the prices at which they can be called by the issuer. However, a global recession will hype defaults even though many low-rated companies have a cushion of safety from prefunded debt.”
“…In another questionable manoeuvre to satisfy the zeal for yield, some managers of mutual bond funds are investing in riskier assets; they then compare their results with their benchmarks, which are composed of safer bonds. This can be dangerous. In 2008, about 40 funds that had big holdings of mortgage-backed securities and derivatives outside their benchmarks lost 10 per cent or more, according to Morningstar Inc.
“There has also been a rush into emerging-market bonds and stocks, even though almost all of those economies are driven by exports, the vast majority of which are bought by Europe, now clearly in a recession, and the U.S., which may be soon. Just look at sliding Chinese export growth.”
Strategies For Bond Investors In 2013 (iShares Blog)
In a low interest rate environment in the U.S., and slow global economic growth, BlackRock’s Matt Tucker has three bond strategies for 2013.
1) Focus on municipals and credit – There will likely be sustained interest in riskier fixed income sectors like investment grade credit bonds and muni bonds are competitive 2) “Look outside the U.S.” 3) “Rethink the role of Treasuries” – Some investors worry about higher yields on Treasury prices but as bond investors rotate into riskier sectors “even a small amount of Treasuries can anchor a portfolio risk”.
Advisors Are Modifying Traditional Risk Metrics (The Wall Street Journal)
Financial advisors are moving beyond “risk-adjusted returns” are factoring in emotions in constructing long-term portfolios.
“At the centre of this debate is how to measure risk. Some see it as comparing numerical modelling that tries to match past return patterns to volatility metrics such as Sharpe ratios and standard deviation figures. The idea is that such a process can quantify an investor’s chances of running into unforeseen market bumps as a portfolio becomes more aggressive in nature.”
Advisers are trying to devise ways to balance out what traditional risk metrics suggest and what clients are comfortable with.
The Fed’s Loose Monetary Policy Is Hurting The Economy (JP Morgan Funds)
JP Morgan Funds’ Dr. David Kelly and David M. Lebovitz believe that the Fed’s loose monetary policy is doing more harm than good to the economy. “”Easy money has now gone well beyond the point of being ineffective in stimulating the economy and is now, in fact, a significant drag on U.S. economic growth.”
Photo: JP Morgan Funds/Morningstar
In a new blog post, NYU finance professor Aswath Damodaran writes that there is now a 90 per cent chance that Apple is undervalued. He offers five cautionary notes to value investors that are sticking with Apple, but pointers that apply to value investors in general.
First, he says “Don’t bet the house” – you have to not just be right about the value but also about the market sharing your view. Second, “Don’t double down” – take a stand against the market but don’t make this about ego. Third, “Think of buying the business not the cost” – Forget what analysts and portfolio managers are doing, watch the fundamentals. Fourth, “Do not track the day to day stories”. Fifth, “Be willing to wait”.
Corporate bonds are closely tied to the credit of their home country. But emerging market corporate bonds are much more closely tied to their country’s credit.
A new report from the National Bureau of Economic Research finds that, “an increase of 1 percentage point in the sovereign credit-default swap caused a 0.71 percentage-point increase in the CDS spread of corporations headquartered in that country. The relationship was stronger for state owned companies, but weaker in nations with strong property rights.”
There is for instance a 69 per cent correlation in Malaysia, 49 per cent in Mexico, and 40 per cent in Russia. While in the U.S., Japan, Germany it is below 10 per cent.
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