This year, investors have been gobbling up US treasuries in a desperate effort to search for safety. But would they have done better to grab Australian sovereign debt or Singaporean bank bonds, as a shield against political incompetence in a fractious world?
If the wealth management arm of Merrill Lynch is to be believed, the answer could be “yes”. This month, the US broker is quietly circulating a memo which tells its affluent clients to reposition themselves — and their portfolios — for a fundamental geopolitical shift.
During much of the late 20th century, the broker says, the world was shaped by American-dominated institutions, such as the Group of Seven wealthiest nations. But during the financial crisis of 2007 and 2008, it became clear western dominance was crumbling, and the focus moved from the G7 to the G20, which includes emerging markets such as China.
But now the G20 is looking impotent too; thus the world is trapped in a scary limbo. China and the other emerging powers are wary of taking a leadership role, but the west is declining. The net result then, is that nobody is in charge; it is an unstable “G-zero” world, to use the phrase posited by Ian Bremmer, the political consultant.
Merrill Lynch is trying to tell its clients how to respond (other than panicking and burying gold in the ground). It suggests, for example, investors should put money into companies, not governments, since the former are more reliable, transparent and growth-orientated. It calls for a rethink of the traditional binary distinction between “developed” and “emerging markets” countries; the latter includes some countries (such as Ghana and Indonesia) which are likely to flourish for structural reasons, but others which are not.
It recommends buying exchange-traded funds (ETFs), to guard against the inflation and sky-high taxes that it fears will be unleashed by desperate governments. And the US broker says it is time to abandon the idea that treasuries are a special asset class, let alone “risk-free”; this no longer makes sense in a G-zero world. “Unlike old US-centric portfolios that called for nearly half of bond allocations being dedicated to US treasuries and municipals, [our] current models consider all bonds “global”,” Merrill Lynch says. Hence that interest in Australian sovereign debt or Singaporean bank bonds.
Now, Merrill Lynch is certainly not the only broker currently exploring these ideas. And not everyone will agree with the details of this survival strategy. (I always get suspicious when brokers start flogging ETFs, since they get fees if investors buy these products, rather than burying gold.) But if nothing else, this memo is an intriguing sign of the times, on several levels.
After all, a decade ago, when investors tried to decide where to allocate their cash, they typically did so by crunching through macroeconomic numbers. These days it is becoming clear that the crucial issues for the global economy cannot be plugged into a spreadsheet.
This shift is scary in itself for investors, given that most were trained to handle hard numbers, not vague issues such as political culture. What is doubly unnerving is that western politics is not behaving as we think it should. The years after the second world war were not just a period when the G7 ruled; there was a presumption that politics should be imbued with a positive vision and sense of mission, whether national or local. So, seven decades ago, the west created the Bretton Woods system, and 16 years ago, at the height of the Asian financial crisis, journalists quipped there was a “Committee to the Save the World”, or an informal group of US policy makers trying to quell the crisis.
But today, as Merrill Lynch notes, there is no dominant bloc or power; nor (though the broker does not spell this out) is there vision or mission. Inside the US, politicians still cite the American dream; but no one today quips that US leaders could form a “committee to save the world”, or even the eurozone, And in Europe, politics is being driven not by any positive vision, but a terror of collapse. Fear, not mission, is the order of the day. Rarely has politics seemed so crucial for investors, and yet so impotent. The craft of government has become defensive, reactive, small-minded and profoundly frustrating to watch. If you doubt this, consider those endless eurozone summits or American fiscal debates.
And yet, what the Merrill Lynch note shows is that some financial players are now trying to adapt: rather than endlessly dreaming of a new “solution” (to the eurozone or anything else), some asset managers are now adjusting to an era of grinding instability. In some senses, this is profoundly depressing; but in other senses, this process of adaptation may offer a crumb of cheer. Or at least it does if you are a Singaporean bank that now wants to sell bonds; for the American government trying to sell treasuries, investor “adaptation” may come as a nasty shock.