2024年3月29日星期五
 
專家論市
Martin Hennecke
Martin Hennecke
Chief economist at The Henley Group mwh@thehenleygroup.com.hk
"With uncertainties about the state of the global economy lingering, and investors being very fearful of investing generally, one of the important things to be reminded of at such time is that past performance does not mean future performance."

Russia beckons as fears drive rush into bonds
22/10/2012


With uncertainties about the state of the global economy lingering, and investors being very fearful of investing generally, one of the important things to be reminded of at such time is that past performance does not mean future performance.

Also, low volatility does not mean safety. Those things are important to remember now.

This is because with equity markets weak, and commodities volatile and weakish as well of late - although gold is still up for the 11th year in a row so far - many investors have been crowding into bonds and bonds funds, particularly those including a substantial exposure to long-term US treasuries, in order to seek safety and stability of returns and yields.

It is true that those type of funds have been doing quite well in the past years.

This is why they look good and are being actively marketed by many banks who now tend to sell whatever is easy to sell on past performance.

It is probably as much the fault of the banks as that of investors being concerned mostly with good-looking past performance as an indicator of future performance, rather than looking for value.

But that good past performance is due to the fact that we have been witnessing a falling interest rate environment for many years now.

Market fears have driven investors into bonds to seek shelter or safety, yet with interest rates now being at an all- time low, and the only way forward being up (ie, a rising interest rate environment), and with the US and European g

overnments seeking their way out of the unsustainable debt/fiscal cliff crisis through quantitative easing/bailout policies, which foreshadows rising inflation in future, those type of bonds and bond funds may now be the biggest bubble of all.

There is little upside potential and considerable downside risk of a bond- market selloff and inflation eating into returns and purchasing power of the paper asset held, two risks often going hand-in- hand.

Bonds, like cash, have no intrinsic value and rely fully on the stability of currency.

So instead of buying what everybody else has already been bidding up to expensive bubble-type levels with little upside - such as these types of bonds/bond funds - why not consider some of the assets that are being shunned by most of the mainstream investing public right now?

A number of markets not only trade at very attractive valuations presently, but also offer full inflation protection, as everybody else is too scared of anything that doesn't look nice on a recent past- performance chart, which is usually just the best time to gain exposure.

One such example of an attractively valued market at this point would be Russian equities, which trade at historically low price-to-earnings ratios of 4-5 (as well as attractive price-to-book ratios and dividend yields).

This represents not only a substantial discount to most other markets, but is also very cheap, even by Russian standards or historic valuations.

This apparent unreasonably low valuation may be partly due to investors reactions to recent bad press that Russia has been receiving following the Pussy Riot incident as well as the disagreements between Russia/ China and the United States on Middle East policy.

But there are always two sides to such stories, and either way those issues have little to do with actual earnings of Russian companies. In any case, it should also be noted that such a position represents considerable risks as well.

After all, equities generally can be a volatile asset class, plus Russia remains a particularly volatile emerging market.

But as part of a diversified portfolio, some exposure may enhance overall portfolio performance based on the current attractive risk/reward trade-off profile. Moreover, given Russia's strength in energy/natural resources, it may also provide a degree of protection against inflation (ie, energy inflation) as well as protection against a possible Middle East oil crisis that may actually benefit Russian energy companies, should present tensions escalate.
 


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