Choppy waters ahead

An increasingly volatile investment environment and dangerously high debt levels mean investors can be rewarded for supporting more vanilla investments — but that doesn't mean it will be easy.

Dr Pippa Malmgren is a respected UK-based economic adviser. She warns investors are entering a “much more volatile environment” than has been seen for some decades, describing recent economic history as an “aberration” in what is normally a higher-volatility trend.

Malmgren pointed in particular to the debt burdens currently weighing down Western economies — burdens that introduced “a level of risk we’ve not had to consider before”.

“It’s not just Greece. Exactly the same is facing Portugal, Spain, and arguably Britain has something on a similar scale — the public just hasn’t worked it out yet,” Malmgren said.

“Markets are like a shark — they go after the smallest and slowest, and that was Greece. But that’s a symptom of a much larger problem.”

Malmgren said questions about the states’ abilities to fix their debt problems are resulting in the market pricing corporate debt better than sovereign debt.

Furthermore, investors are now able to generate more returns without having to take complicated risks — the inverse of the trends over the past decade. With market interest rates rising, investors can be “paid a huge amount of money just from being a plain vanilla lender”.

“If banks are not going to lend, you can be paid to be a lender. But you have to be selective. There’s a reason banks aren’t lending — some businesses are not viable,” Malmgren said.

“Plain vanilla doesn’t mean easy. You still have to use your judgment.”

Malmgren also argues that index investing “doesn’t make so much sense anymore”. She believes investors should identify companies with “genuine” unimpaired cash flows, and brands with a capacity to increase their cash flow.

Meanwhile, Government revenue raising initiatives across the world will see taxes on windfalls, such as the mining tax here in Australia, as well as higher taxes “for every asset that can’t be moved” — including property.

Dr Pippa Malmgrem will be presenting at this year's Portfolio Construction Conference, 24-26 August 2010.

You can watch the full interview with Dr Malmgrem here.