Who would have thought that more
money flowing into businesses would ever be a problem? But as the saying goes –
more money, more problems.
Globally, there is more money pilling into
savings than businesses believe they can make use for in a productive manner at
the moment. Nearly every asset today is expensive by historical standards. In
New York, for instance, an art deco office tower on Wall Street sold for US$585
million two months ago when it was estimated by real estate experts that it
wouldn’t sell for more than US$466 million. In France, Numericable (a
cable-television company) was able to borrow around US$11 billion. This makes
the deal the largest junk bond deal on record despite the interest rate being
as low as 4.875%.
On a global level, what we are seeing are two
driving factors: (1) the aforementioned pile up of money that is swarming into
businesses; and (2) the central banks have been on a six-year campaign of
holding down interest rates and creating more money to stimulate stronger
growth after the 2008 financial crisis. According to the chief investment
strategist of BlackRock, Mr. Russ Koesterich, there are not many bargains for
investors. As part of one of the world’s biggest asset managers, one of the
prime duties of Mr. Koesterich is to scrutinize the market and squeeze out the
best deals for investors. However this may not be that simple anymore.
“We’re in a world where there are very few
unambiguously cheap assets. If you ask me to give you the one big bargain out
there, I’m not sure there is one,” said Mr. Koesterich. Those looking to look
for a substitution internationally will be disappointed as well. Spain and
other southern European nations have experienced plummeting bond rates.
Emerging markets, which tend to offer higher interest rates because of higher
inflation and less political stability, are now offering record low interest
rates. Take bonds issued by the governments of Malaysia or Brazil, for
instance. Both are prime examples of nations that are currently yielding a
relatively low 4%.
Presently, if you look at the U.S. companies
listed in the S&P 500, every dollar invested in stocks buys around 5.5 cents
of corporate earrings. This number is down from 7.4 cents two years ago. At the
same rate, the price of office space and residential space has risen. In the
United States, office space in central business areas costs US$300 per square
foot on average, which is up from US$147 in early 2010. If you are an investor
in New York, you can expect rent payments after expenses to add up to a 4.4%
return, which is lower than what it was in 2007. Safe assets like U.S. Treasury
Bonds have been playing an important part in offering investors paltry returns
for quite a while now. In the post financial crisis period, what we are seeing
is that risky assets such as junk bonds and emerging market bonds have joined
the party of offering paltry returns to investors. The bigger question for
investors still beckons. How long will this low-return environment last?
In a more optimistic outcome, investors can
expect things to pick up. Today’s expensive assets can begin to look more
reasonably priced. Global central banks are already trying to simulate growth
though low interest rates and are buying assets with newly created money.
“Interest rates are so low,” said Peter J.
Clare, a managing director and co-head of the U.S. buyout group at private
equity firm The Carlyle Group. “There are few other attractive places where
investors can direct their money, so it drives investor money into equity
markets. It’s just the most basic of supply and demand equations: When there’s
more demand, it drives up the price and pushes valuations where they are
today.”
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