Emerging markets up, commodities up, gold up, bonds up, and even advanced economy shares recovering. It’s an investment manager’s paradise, where all can be winners. The usual rules have gone out of the window. All assets are correlated. They turn out to be guided by easy money. This is the quantitative easing boom.
At times like this investors should become more alert to risk, not less vigilant. It is easy to get sucked into the idea that there are good reasons why all these assets should get dearer. It is comfortable to think this is just a normal cycle, only a bit bigger with the asset price recoveries speeded up. It is not.
It is possible rising markets continue for longer. That will depend on how much longer the main governments continue with ultra low interest rates and with easy money in money markets. The UK is going to do so for the rest of this year, and President Obama seems in no hurry to stand down the special measures. It also depends on how much longer markets will let them do this, and for how long investors will ignore the need sometime to adjust the world economy to better balance. Those who want to run equity risks should continue to do so. Those who want to ensure a reasonable real return should be taking some profits as the markets rise. Money put to work in the first half of the year has already earned very good returns for people.
The US, the UK and the other big debtor countries will one day have to drop buying up their own bonds, and find out the true price of borrowing all that money in the markets. That is likely to mean higher long-term interest rates, which will be bad for bonds. The successful exporting economies like Japan, Germany and China, will have to discover new markets to replace the distressed US and UK consumers. We are in for months and possibly years of the US and UK consumers paying off debt and being reluctant to borrow. Sometime the countries that are borrowing too much will have to rein in their state expenditures.
Many more forecasters are coming round to the view that Asia will perform better than America or Europe. Despite that, most portfolios I see still have large positions in US and UK shares, and small ones in Asian equity. Asia has outperformed well this year, but the long-term case remains very strong. We are offering to put money into Asia quickly on a passively managed basis for larger funds that are still underexposed, as we think it makes strategic sense to do so. We can manage the country exposures and watch for worrying signs in Asian markets for Trustees.