Visiting global strategist Michael Power from Investec Asset Management suggests new safe havens for stranded investors
The enormous injections of liquidity via quantitative easing (QE) has created a financial ‘Waterworld’, flooding the global monetary system and significantly altering the investment landscape, according to Investec Asset Management Global Strategist, Dr Michael Power.
Dr Power, who is visiting Australia this week at the invitation of Investec Bank (Australia) Limited, presented an analogy with the 1995 Kevin Costner film, Waterworld, where humans were forced to navigate a submerged world.
Dr Power believes the almost limitless liquidity injected to the global monetary system has melted the monetary ice-caps, in the process destroying the traditional risk-free rate investing anchors – or “dry-land”.
“The concept of risk free investing, where capital invested earns a positive after-inflation return has underpinned fixed income and equity investing in the Western world over the last three decades,” Dr Power said. “However, the liquidity injection of central banks has moved developed markets interest rates underwater, sinking many safe haven returns below inflation.”
Expanding balance sheets
Dr Power explained that the ‘Waterworld’ has been created by the dramatic expansion of central bank balance sheets as governments around the world have taken on further debt since 2008. At the same time, the populations of developed economies of the West and Japan continue to age.
“Quantitative easing, in effect, is a frantic effort by Western and Japanese authorities to stop the natural deflation of their economies as the population ages and the size of their workforces start to shrink as a percentage of total population,” Dr Power said.
“Were technological advances and hence productivity so profoundly positive as to offset this demographic drag, economic growth would remain healthy. However, this does not seem to have been the case and Japan in particular has now endured two lost decades of growth and the question on where to invest is becoming more difficult to answer,” he said.
Where to find dry land?
Dr Power believes that the ultimate destination for capital is “dry-land” – in other words, new safe havens offering new risk free rates with real yields that reset the foundations upon which to base both fixed income and equity investment decisions.
According to Dr Power, the challenge for investors as navigators of capital will be to first preserve capital, navigate macroeconomic headwinds, and set course for emerging opportunities.
“As asset managers, we must see ourselves as the navigators of capital, unanchored from the traditional certainties of a positive-yielding risk-free rate. Our challenge is to choose the appropriate vessel, ensure capital is preserved and deal with the structural changes caused by central bank liquidity as new anchor points emerge,” said Dr Power.
He said many of the anchors will be located in emerging markets, and that inflows to Asian currencies already reflect this changing landscape.
“We believe safe havens should offer investors a risk free real return, not a return free risk, which is becoming increasingly difficult to find in developed markets,” he concluded.
