Note Précis August 14,2018: Data Driven versus Whimsy Oriented – At present, data driven versus whimsy considerations have wide relevance – from the interface between politics and trade to capital markets and valuation to central bank policies. In addition to global conflagration over terrorism that is difficult to incorporate except in extremis, volatility in the terms of conducting trade and currency stress adds to uncertainty about revenue generation. We see reassessment as being overdue of risk, based not on the rear view mirror of a decade of minuscule rates. It needs a more dynamic forward view of debt servicing costs amid rising rates and for spreads implied thereof, including equity valuation. Markets and ventures generally have a mix of being data driven and of being whimsy oriented but imbalance likely elevates risk.
In recent capital markets, much is being made about how using low administered rates makes generally stable valuation. Being data driven within decade old quantitative ease (and in Japan two decades old), artificially suppressed interest rates likely do not eliminate detriment to potential liquidity in markets. In this summer of 2018 and even amid minimal rates in Europe, spreads in 10 year sovereign debt for Italy have risen sharply. Alongside others for myriad reasons, emerging countries Argentina, Brazil, South Africa and Turkey (with collective GDP the size of Germany) show severe stress, along with currency decline in India and noticeable such in China. The historical cost of capital reality is that the impact is not static in being driven by point-in-time interest rates but instead is dynamic in their evolution.
Despite ostensible opportunity costs, such aspects call for diversification including that into cash reserves and precious metals as hedges. Despite present strong year-over-year U.S. corporate earnings gain, from worldwide industrials to financials and beyond, bifurcation in delivery has been present for years now – not least among marque companies. In investment holdings, we favor quality of operations and financial strength, whether in equity holdings of growth or value as well as in fixed income, whether sovereign or corporate based.
StrategeInvest’s independent consultancy operates as Subodh Kumar & Associates. The views represented are those of the analyst at the date noted. They do not represent investment advice for which the reader should consult their investment and/or tax advisers. Any hyperlinks are for information only and not represented as accurate. E.o.e.