When the 10-year U.S. Treasury yield fell below 1.5 percent this week, several CNBC commentators said investors had reached the point of being too afraid.
And why shouldn’t they be? Europe is a mess, China is slowing and there hasn’t been as much of a whiff of more monetary stimulus from the Fed or the European Central Bank (ECB). After the tech bubble and 2008 financial crisis, capital preservation – if you can pull it off – looks pretty darned good.
But experts say playing it too safe might come back to bite your portfolio.
“Return of principal is not the same as return of purchasing power,” Michael Gayed of Pension Partners told CNBC Asia. “Investors are behaving as if a crash has already happened.” Gayed thinks investors who play it safe now will have their purchasing power eroded by the time they work up the nerve to jump back into risk assets.
Jack Bouroudjian, CEO of Bull and Bear Partners agrees. “We are faced with what I like to call “Growthflation” - growth on one side and people trying to inflate their way out of problems on the other. Those left uninvested are going to be left on the sidelines without purchasing power parity over the course of the next five to ten years.”
Wealth managers confirm the safety trade is gaining momentum.
Arjuna Mahendran, Head of Asia Investment Strategy at HSBC told CNBC Asia more of his clients don’t like equities because of the volatility. “The yields - particularly on high grade corporate bonds are nothing - you're looking at two to three percent and you have inflation at five percent in places like Singapore and Hong Kong. This is frustrating, the world has changed since 2008,” said Mahendran.
He advises risk adverse investors to adopt a barbell strategy, which will allow them to sleep at night and beat inflation. “You have a core of lower yielding bonds and a satellite which gives high yields to compensate for low yields in the core. That is the way to raise the average yield, keep inflation at bay and it doesn't erode the overall value of your portfolio,” he said.
Bouroudjian agrees that investors have to get the protection of higher yields layered into their portfolios. “Corporate America right now is strong. Balance sheets are clean. It's making twice as much as it was making a decade ago so that's where you have to look for if you're looking for yield.”