The letter L isn't in Wales

I was in Wales last week and decided to take my teenage son shopping in Cardiff. He’s half Welsh, yet recent football events have prompted him to acknowledge his Welshness, which basically meant me buying him the Wales shirt. Of course, he wanted Bale 11 printed on the back, but incredibly, we were told they’d run out of the letter L and that there were no Ls left in the country.

12 August 2016

We had to choose another player, so my son suggested Allen (I must speak with his English teacher in September), but eventually we settled on Ramsey 10.

Ok, so what’s this got to do with investments? Well, the world of asset allocation is facing its own ‘L’ dilemma. If you’re familiar with the Rathbones Liquidity, Equity, Diversifier (LED) approach to asset allocation, you’ll understand that Liquidity in the corporate bond markets continues to worsen and this causes me great concern.

In addition, ‘Santa Carney’ has been giving presents to company CEOs with lower rates and QE. Only this week we saw BMW come to the market with a 1% coupon over six years and BP 1.3% coupon for seven years.  Vodafone issued 40 year paper at 3%. Well you would, wouldn’t you?

Let’s think about it, we’re being asked to lend our capital for 40 years for a 3% annualised return. The duration risk is huge so your risk reward trade-off is off the scale. Who but liability matching pension funds is going to be tempted? The dealing spreads we’re seeing some days is bigger than the yield and yet many find a way to rationalise this.

I can’t help but feel we’ll look back at this one day much as we do when we think of the PEs that were paid for any company with a dotcom address in the late 90s. Did we really buy corporate bonds with a 1% coupon? Yes, but it was a ‘new normal’. Hmm, sounds like new paradigm to me and we know what happens when we believe in those.

So what do we do? Well, if it looks like a pig and oinks, it’s probably a pig and you should stay away. Equities look much more attractive to me if you’re careful and very selective. I can see a re-rating of equities as the world adjusts to no inflation and negative interest rates. What looks expensive might be a steal – now that is a new paradigm! I still think however £55 for a Wales football shirt is too expensive – for a start, they play with the wrong-shaped ball.