Safe-havens under water due to global liquidity injections
The regular safe-havens for investors in cash, bonds and real estate have all become unstable due to central banks around the world injecting large amounts of liquidity through quantitative easing (QE) and creating widespread instability in the investment landscape.
Investec Asset Management Global Strategist Dr Michael Power said the monetary ice-caps had been melted by this ongoing injection of liquidity and had destroyed the usual risk-free investment anchors used by individuals and corporates around the world.
Power said the massive injection of liquidity by central banks had moved the interest rates of developed markets underwater and that ‘risk free-returns' had been replaced by ‘return-free risks'.
"In this environment we will need to reassess risk, and that is not just volatility but also outright capital loss. The return of investment has now become more important than the return on investment," Power said.
According to Power, the ongoing use of QE has occurred at a time when central banks have increased their debt levels, and as developed nations face a growing aged population who are contributing less to economic growth but requiring more resources to support through pension schemes.
Power said QE was being used by developed nations to stop deflation as their populations age and their workforces decline, but questioned whether it was the required approach.
"Economies do not grow when the population shrinks and when the gap between pension income and payments leads to climbing levels of government debt," Power said.
"The question then is whether QE is the right battle to be fighting to deal with inflation in these economies, as it appears central banks do not understand how to manage economies where there are populations with declining workforces."
Power said the search was now on for new safe havens which would offer less risk and real yields from fixed income and equity investments. These would be in emerging markets — and currency movements in Asia were confirmation of this shift.
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