Goodwill Hunting In Stocks and Bonds
Was it the supermoon that I did not manage to catch last night ? And Robin Williams has departed from our world.
I read a comment on Twitter about a Catch 22 situation that a CFA study has found that 55% of investors think that developed markets equity is overvalued but 75% think that bonds are overvalued over cash that yields nothing at the moment.
I have not checked out the article or the study because that is ancillary and the truth of the matter is that investors are finding it hard to find value in both asset classes that make up the bulk of our investment world besides the thorny real estate markets.
Extracting the Bloomberg Global Investment Grade bond index and the Global High Yield bond index which began in Jan 2010, the returns are not surprising.
Investment grade returns 27% (from 100 to 127)
High yield returns 52% (from 100 to 152)
S&P 500 return (excl dividend) 72%
With everything rallying in the past 4 years, we are sitting very nicely on multi year highs. Juxtaposing the 10Y UST yield into the picture, we note that the credit and stock market largely ignored the sharp spike in the risk free rate last year and if you ask me, it does look to the naked eye that US treasuries are more volatile than the riskier asset classes.
A trader commented to me that it is hard to be honest in a bond market where most are desperately trying to pare down their inventory as corporate profit margins hit a historic high (SOURCE : BUSINESS INSIDER) which is good news for equity markets.
There is little goodwill left with banks marketing bonds because “banks are now less able to facilitate trading in secondary markets, bound by stricter regulation and higher capital requirements. Low liquidity can “trap” sellers, accelerating price falls. This makes credit markets vulnerable ….. (SOURCE : FT)”
The largest ever outflow from junk bonds last week should say something but the funds and institutional investors often get priority in the sales queue. Thus I am highly skeptical of all the buy calls I am receiving in the In Box that suggest this is a good time to buy into credits.
There are no warning signs. Speaking to a fund manager friend this morning, he says his view now extends beyond the realms of quantitative or economic analysis. Raising my eyebrows, surely it cannot be a gut feeling ?
No. Certainly not. Because we have been pummeled into submission to accept zero interest rates that anything else feels like a windfall. It is a perception issue that some people are beginning to feel is not good enough.
And for the layman, goodwill hunting (pun intended) in the ocean of piranha bankers to find a good investment is as good and dead as dear old Robin Williams.