We are already seeing evidence of a new paradigm in the world of finance. The New Normal of which so much we have spoken at repeatedly It is here and it is here to stay. So we have a very uncertain outlook ahead of us. With an influence of central banks that has never been seen before and that distorts everything, but be careful: an intervention that tends to be reduced in the USA and increased in Europe.
Let's take it one step at a time. As far as equities are concerned, it should not escape anyone's notice that stock prices in the US and even in many Eurozone countries are expensive. It is true that the influence of exceptional measures by the respective central banks can keep company prices well above their fair value for a long time. And that this is a desire that every ruler usually embraces, as it improves, at least in appearance, the financial state of the population and its consequent consumption, optimism, voting, etc. But we should not forget that QE in the US is on its way to drying up and that rates are close to a rationalisation in the form of a rally. Therefore, the US stock market has anything but fundamental appeal. And the universal law of the market is implacable, so investments in expensive stocks relative to the fundamentals of these businesses will only lead to disappointment - permanent losses - in the medium to long term.
As for European equities, things are much more heterogeneous, as is the state of the economies of the Eurozone member countries. Multiples that may be reasonable in Germany are not so reasonable in the periphery, where the outlook is much darker. Moreover, even the most competitive economies, despite not having bubbly share prices, are far from being cheap and attractive as elsewhere in the world. The risk of a rate hike by the ECB seems more distant, but a rise in interest rates in the US could well also infect the European stock market, as there is certainly no shortage of excuses for turbulence (peripheral deficits and debt levels, euroscepticism, populist governments, etc).
Therefore, if you are looking for equity investments at good prices in a rising environment, you should look for them in more «exotic», emerging or even frontier markets. There they will find prices and growth that we have not seen in the developed world for almost five years, but with high volatilities. Woe betide those who make their investment decisions (or advice...) on the basis of the volatility criterion, since low volatility is by no means synonymous with safety, and vice versa. Today less than ever.
Regarding fixed income, we say that it is no longer fixed because corporate and developed state issues have lost much of their solvency, whatever their prostituted ratings may say. And because the distortion of near-zero rates is coming to an end, meaning that coupons will be sailing against the tide, i.e. with low or negative yields, for many years to come. For those who are thinking about inflation-linked bonds, remember that official inflation is increasingly manipulated and out of touch with reality (I recommend reading about the financial repression in books such as Code Red by Tepper/Mauldin). It is true that emerging corporate issuers are more creditworthy, as their debt is lower and their economic growth is higher. And here again we have to contend with higher volatility, which was negatively evidenced during the summer of 2013, when the US Treasuries deflated significantly, dragging all global fixed income into negative territory. Therefore, the poor solvency of developed issuers (corporate and sovereign) due to their runaway indebtedness, the greater volatility of emerging issuers and the prospect of rate hikes over the next few years make fixed income anything but fixed.
The million-dollar question is where to park the proportions of portfolios that cannot withstand the volatilities of the stock market. This opens up a whole world of alternative investments, but we will focus on some strategies through investment funds, as direct investments in our view have many drawbacks, namely: Lack of regulation in unlisted shares, illiquidity, poor diversification and exits or divestments with very unclear windows in the absence of harmony between the partners, among many other disadvantages, tax, reporting, information, etc.
There are investment funds in the world whose managers carry out an infinite number of strategies that also generate income comparable to traditional fixed income coupons, but which are far removed from the effects of the aforementioned drawbacks (insolvency of issuers, rising interest rates, etc.). A lot of digging and exhaustive due diligence is required, as they tend to be smaller funds than those marketed in the usual circuit of the banking sales catalogue (plain vanilla funds). For example, we can find managers making bridge loans to medium-sized companies in the US, UK or Australia, with maturities of 30, 60 or 90 days while waiting for bank credit lines to be granted, with the collateral of the most liquid assets of these companies. Some of these funds offer returns of approx. 10-12% per annum. Other funds are involved in buying and selling mortgages in the US market, where the underlying collateral - real estate - is already in a clear upward cycle after purging prices to levels of almost 40 years ago. Others broker commodity trades, or finance the international freight trade of ships full of containers around the world. These very diverse strategies have in common the generation of more or less fixed income, far removed from the volatility and risks of the stock market, traditional fixed income, illiquidity or rising interest rates. They may not be the panacea for decades, since some of these strategies will also suffer in the long term (for example when the US housing cycle returns to bubble mode, in the case of the strategy that buys and sells mortgages), but for the next few years they may be very valid and help us to avoid the storm that is looming over traditional fixed income.
Unfortunately, this type of fund is not easy to find for the ordinary investor, as they are not usually registered for marketing in Spain. Therefore, investors must have a free investment vehicle, through which they can access these funds, deferring the capital gains as if they were any other fund. plain vanilla marketed by the Spanish bank around the corner. And unfortunately the minimum volume to be able to have one's own investment vehicle suitable for these or other investments and deposit them in a bank in Luxembourg is around 500.000′- euros, as we already mentioned in «.«Should I invest from Spain or from Luxembourg?«. Unaffordable for small investors, but nevertheless within the reach of the intermediate investor. And without losing sight of the fact that managing assets through a Luxembourg vehicle, as well as being fiscally totally legal and transparent, considerably reduces country risk in the face of future incidents that may occur in the European periphery. In the coming years, the investment world will belong to those who are able to find alternative income for their portfolios to traditional fixed income, which has been mortally wounded by the debt crisis and the financial repression over the next few years.