A Boom or A Bubble?

The world seems to be in a state of fervor with appreciating investment assets. Could the apparent nascent of global economic recovery be disrupted by mere interest rate rises or even geopolitical threats? On the one hand everything appears to be chugging along very nicely in the boom. However, there are other influencing aspects which many opt to overlook as the vast majority of the world join the ever growing herd stampeding onward in their quest for wealth accumulation. Or are they really inflating an asset bubble?

Asset values have increased such that they seem to be at all-time highs. In turn, these price increases have created a reduction in yields. Investors are thus looking further afield for superior returns but seem to be having difficulty finding anything really meaningful.

Two years ago Spain had a major debt crisis. It recently issued government bonds at the lowest interest rate since 1789. Similarly, a French cable television company issued USD11billion in junk bonds for which it offered 4.875% interest, a relatively low rate of return for high risk bonds.

In New York, a Wall Street office building was valued at USD466m in February 2014 and was sold for USD585m in May. Why would this happen? In Manhattan, net rental returns before tax are now averaging 4.4% which is lower than in 2007, at the top of the previous boom.

From another perspective, is this not healthy? Markets are rising and investors are experiencing elation at the paper gains they have made. Should these gains be crystallized now or will greed take hold whilst investors dig in for more profits? If you look a little further into the future, where would you find a decent alternative?

One unique aspect of this current asset inflation is that all assets have risen by epic proportions to their heights of today. In 2000, when the stock markets were in their height of the bubble, other assets like bonds, emerging markets and real estate looked reasonable. Now all assets are high.

Emerging market bonds are producing mediocre yields compared to their historic returns. Countries like Brazil and Malaysia are currently offering around 4% yields. Emerging countries are always considered higher risk because of high inflation and political risks but the rates on offer are relatively low.

US equities are currently averaging yields of some 5.5% compared to 2007 levels of 7.4%. But equities are currently the flavor of the day because money is driven to the sector through a lack of other attractive choices.

Central banks continue to hold interest rates low because they are trying to stimulate growth. Just imagine the inflated cost of interest on sovereign debt if rates were to increase.

Again there may be a contrast here with historical statistics. The 2008 crisis began when the price of oil spiked. From that point there were a number of events which occurred, culminating in the ensuing mayhem. Oil recently broke out of a trading band which is considered “safe”. However, it then fell back and even shows signs of dropping below that band. Looking at the difference in supply and demand back in 2007, the USA was then the world’s biggest importer of oil. Today it is one of three top exporters globally. The market has changed.

Commodity values have been depressed for more than two years now and maybe these markets will show improvements in the future. However, as with gold and recently with forex, are these markets manipulated within themselves for the benefit of a few? This asset class is surely a very risky area indeed. When commodities are rising it seems like child’s play and investors wonder how they could ever lose. However, when there are downward trends and the markets turn fickle the exact opposite is true.

So, one of the things which many investors are wondering is; how long can this rising growth period continue? Is there an asset bubble growing? Is there going to be a crash? Will it be equities or other markets?

Some schools of thought are that there have been a number of castles built in the sky and that governments are trying very hard to build foundations and reclaim sufficient land for the castles to rest on. This is planned via sustained economic growth which will encourage businesses to flourish, enhancing economies even further.

Others say that the edges of the castles in the sky are already looking weak and even crumbling. In 2008/09 debt was switched from private individuals to governments. Private sector debt has increased again and has become more prevalent in developing countries. Perhaps the tidal wave is sweeping the globe.

If you are an expat with a nest egg, pension, investments or any other kind of assets these are the things you need to be cognizant of. Knowing what to do next is tricky.

Questions to the author can be directed to PFS International on 02 653 1971 or email to enquiriesthailand@fsplatinum.com

Andrew Wood has been an expat in Asia for 34 years and is Executive Director with PFS International. He has been writing Net Worth articles for six years and has made a significant contribution to the PFS library of financial service articles dating back over nine years. These articles which cover the complete A-Z of financial planning are available to readers on request.



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