man on rope

The Annuitants’ Euthanasia

An investor torn between more frugal returns and abundant risks: this is the vision offered to us by Sébastien Cavernes, Chief Investment Officer, at Edmond de Rothschild Monaco in the latest investment letter from the financial establishment based in the Principality.

« The loss of the two main functions of government bonds in developed countries becomes a huge challenge in building a traditional diversified portfolio (stocks / bonds). Unfortunately, and in all cases, the loss of function of Treasury bills leads to a deceptive choice for the saver. The latter will have to arbitrate between:

  1. Reduce their long-term return expectations on their savings;
  2. Increase the risks of their portfolio if they want to achieve the same potential profitability;
  3. A combination of the two. »

Having lost the reassuring comfort of government bonds, Sébastien Cavernes suggests that investors look to corporate bonds even if they are not destined to play the role of government bonds.

The other alternative would be to invest in the sovereign bonds of emerging countries which “constitute a credible and opportune investment vehicle to remunerate savings, even if it will not protect the holders in the event of a contraction of the economic activity. »

If we are to believe the various reports from US banks *, the combination of corporate bonds and investment in emerging countries has in recent months offered a market performance superior to sovereign debt. Thus emerging companies were the first to achieve a return of 2.75% between March and September 2020, against 2.32% for sovereign debt.

Undoubtedly more conventional, investors have certainly the possibility of increasing the weight of equities in their portfolios. Sébastien Cavernes then suggests to select “companies with low debt, present all over the world and enjoying a sustainable competitive advantage, which are among those companies whose share price remains structurally less volatile. ».

For investors aiming for performance and with little exposure to risk as possible, there remain real assets whose “integration or increase in portfolios is the most appropriate path to the protection and growth of savings in time ”, according to Sébastien Cavernes.

Gold has notably been the best performing asset since the start of 2020, even exceeding US bonds by 17% **

The transformation that is taking place for investors, amplified by the health crisis, requires everyone to adapt in the best possible way. Both institutions and private investors, once reassured by sovereign bonds, will have to explore other, arguably more daring, alternatives. Some may choose the debt of emerging countries, others investments in real assets or crypto-assets, but one thing is certain, whatever their choice will be, the period is akin to a “euthanasia of annuitants ».

The formula comes from Keynes, and Vivien Lévy-Garboua’s vision of a zero-rate world, former member of the BNP Paribas executive committee and professor in the economics department at Sciences Po, invites us to understand this transformation.

“Keynes presented the “zero rates” as the weapon of annuitant euthanasia. But we are also experiencing the disappearance of banks, that, even faster if they do not change their model, of life insurers, the chronic instability of financial markets, the painful transformation of central banks … in short, the explosion of a financial system that we have tried to rebuild since the financial crisis of 2007-2008 with rules and standards.

And face to this, over-indebted states dream of escaping constraints by borrowing painlessly, companies can reinvest in projects, young people will finally set up their businesses, less young savers are forced to take risks they did not want. when the world seemed calm ».

Vivien Lévy-Garboua – Le Monde à Taux Zéro

* Source: J.P. Morgan, 30 september 2020 – Performance of emerging debt since the start of the year

** The Measure of a Plan – Nov 2020

Article: Joana Foglia

Post Author: Wealth Monaco