US 10-year yields have risen above 5 per cent. As a result, earnings yield - the inverse of the P/E ratio - has fallen below bond yields for the first time this century. With that, equities look vulnerable. The days of TINA are over for good, there is an alternative again and that is bonds.
Yet, after three years of falling prices, interest in bonds is not that great, not to mention what remains in real terms. For years, long-term US bonds were the ultimate safe haven for investors. The moment things storm in the stock market, correlations run high and there are few places left to hide.
Long-term Treasuries faithfully fulfilled that role for years, but after a correction of more than 50 per cent, it does not feel right to label long-term Treasuries a safe haven now. Now, more safe havens have fallen through this year. Fortunately, there are also new safe havens.
From long-term bonds to the Magnificent Seven
The role of long-term government bonds seems to have been taken over by the Magnificent Seven. These large tech companies benefit operationally from rising interest rates due to their often large cash holdings. Competitors that did borrow money have to pay higher interest rates, which has improved their competitive position. Moreover, there is no diminishing returns in artificial intelligence. More data is always better. The market is convinced that they will survive any scenario and, moreover, they attach to this the promise of further growth.
From the Japanese yen to Japanese banks
The Japanese yen used to be a safe haven. That is because in times of turmoil, Japanese investors repatriated their funds, causing the yen to rise in value. This is no longer the case, mainly due to pro-cyclical Yield-Curve-Control (YCC) policies. However, there is a surprising new safe haven in Japan and that is Japanese banks. Of all developed markets, only Japan has a steep yield curve and, thanks to rising inflation and interest rates, Japanese banks are awakening from a long hibernation.
From Gold to Bitcoin
Gold is seen as a traditional safe haven. A key feature of gold should be its protection against inflation, but since the summer of 2020, gold prices have not risen, inflation has. Now Bitcoin is a good alternative to gold. After all, both are worth what the fool gives for it. Bitcoin did triple since summer 2020. Moreover, the iShares Bitcoin looks like a matter of time, which could give a substantial boost to a further rise.
From Rolex to Omega
If any watch brand became popular after the Great Financial Crisis, it was Rolex brand watches. Driven by free money, entire collections were built up. Rolex is used as a medium of exchange in the drug world and on the streets, the chances of being robbed of your Rolex are rapidly increasing. This year, Rolex prices are falling. One brand where watch prices do rise is Omega, also because they are making clever use of social media opportunities. It may also help that India went to the moon this year which also makes Swatch replicas of the Moonwatch popular.
From Japanese Whisky to Chinese Baijiu
Japanese whiskies are also a child of the exuberant liquidity following the Great Financial Crisis. With interest rates at zero, people started looking for returns. If there is virtually nothing to earn anyway, there is also little to lose by putting money into liquor. Artificial scarcity is a tried and tested means of chasing prices here too, and with marketing tricks like the limited editions, it has worked extremely well. Now that bubble is slowly deflating, but meanwhile Chinese Baijiu - best known for Kweichow Moutai - is very popular. Indeed, it is the most valuable liquor in the world. In cash terms, Baijiu’s market share in the spirits market is a whopping 68.4 per cent.
From defensive companies to oil stocks
Defensive sectors such as pharmaceuticals and food companies are performing extremely poorly this year. This is because they are sensitive to interest rate movements. No growth, but higher interest rates automatically mean lower valuations. Moreover, defensive sectors are used as source-of-funds to invest in the Magnificent Seven. Oil companies are much better suited as safe havens, if only because of the geopolitical turmoil in the Middle East. Furthermore, oil companies also offer protection against stubborn inflation.
From classic cars to Retro video games and consoles
The exuberant liquidity has also pushed up the prices of classic cars. Many of these cars have been purchased by people over 50 in recent years. This immediately establishes that prices of old cars will not go up forever. After all, besides money, the generation is also decisive. The baby boomers are throwing themselves into old cars, while the following generations are much less into cars. A good candidate for a safe haven are retro games and consoles; for many people, this kind of childhood sentiment is a safe haven.
From Mulberry to Loewe
The world of luxury bags seems highly fashionable, but good marketing in this case mainly consists of a combination of self-created scarcity and ever-increasing prices. The risk with such products is that a clearance sale or selling through an outlet can kill the brand. The moment the general public senses that these bags are not as scarce as they thought, it is the end of the road. In this respect, Mulberry is currently losing out to Loewe. Loewe seeks the higher price segment and scores high on the Lyst index.
From the old masters to art from Indonesia and India
There are many paintings in the world and ultimately the price is determined by supply and demand. There are few new buyers for the old masters. People in countries that are getting rich create additional demand for art, but often locally. In India and Indonesia, the middle class is growing rapidly and with it the number of potential buyers. Whereas Japanese still flocked to Van Gogh’s sunflowers, the Chinese opted for local art, also because there was not much left after the Cultural Revolution.
From stock market investing to private markets
Rising interest rates make equities look less attractive. But bonds are also currently seen as a falling knife. It is likely that interest rates will only start falling next year. This development is causing turmoil in the financial markets, and investors in private markets know how to take advantage of it. Nothing is better for future private equity returns than a solid recession. Monetary policy, the banking crisis and ever-tightening rules for commercial banks are also allowing private debt investors to get away with it. Other categories in private markets are now also counting on much higher interest rates, as will eventually translate into much higher returns.
Han Dieperink is the chief investment strategist at Auréus Vermogensbeheer. He previously held the role of chief investment officer at Rabobank and Schretlen & Co.