How to position in a low yield environment

Thought of the day

by Chief Investment Office 08 Aug 2019

As investors have gravitated towards safe haven assets, demand for Austria's 100-year sovereign bond has been especially notable. The yield has declined by 96 basis points this year, closing at 0.79% on Wednesday. Long-term yields have been falling elsewhere too: the yield on Germany’s 30-year bond fell back into negative territory on Wednesday and the 30-year US Treasury yield is nearing a record low.

The performance of Austria's ultra-long bond also suggests investors are bracing for near zero interest rates for a generation to come in the Eurozone. Year-to-date returns of 64% make Austria’s 100-year bond one of the best performing global assets of 2019. But with interest rates around the world likely to be low for a long time to come, investors need to consider various strategies to ensure adequate portfolio returns in coming years.

  • Cut back on cash: It is important to hold adequate liquidity to meet expenses over coming years. However, excessive cash holdings are becoming an increasing drag. Our recent investor survey showed that just 9% of investors see cash as the safest long-term investment, compared to stocks, bonds, and real estate. Despite this many investors continue to sit on too much cash.
  • Real assets offer the best chance of meeting your financial goals: With central banks driving down the risk free rate of return and seeking to push inflation higher, investors need to ensure adequate exposure to equities and real estate to keep pace with the rising cost of living. This could be especially the case if rising tariffs and supply chain disruption causes an acceleration in inflation.
  • Borrowing could offer greater opportunities: The falling cost of debt makes it an increasingly important part of a long-term financial plan, reducing the need to hold excess cash, or sell higher return assets.
  • Don't take too much risk on a single central bank. With policy in flux around the world, the potential for central banking missteps has increased. A diversified global portfolio reduces the threat that performance will be harmed by errors in any single jurisdiction.

In the short term, we believe the low rate environment is conducive to carry opportunities. In our FX strategy, we overweight a basket of equally weighted high-yielding emerging market currencies (Indonesian rupiah, Indian rupee, South African rand) against a basket of lower-yielding currencies (Australian, New Zealand, and Taiwan dollars). Over a longer-term time horizon, investors should also consider the strategies above to increase the chances of meeting their financial goals.

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