Eoin Treacy's view
Opportunities and Threats for long term investors - The adoption of capitalist oriented policies by most of Asia and to a lesser extent Latin America, in combination with flourishing global trade has helped to raise hundreds of millions of people out of poverty and into the middle classes. Catering to their needs and wants is driving major bull markets in commodity related investments. More recently consumer related sectors such as healthcare, consumer discretionary, consumer staples, finance and technology have also benefitted from the same theme.
There has been a great deal of speculation about where the next bubble is forming. Will it be in emerging markets, gold, social media, commodities generally, technology or another asset class. All of these offer the potential to host an investment mania at some point in the future, but these answers ignore a more obvious candidate.
Government bonds have been in a 30-year bull market which now has a number of topping characteristics. As a result government bonds are more a threat to one's long-term wealth than any of the other sectors mentioned above.
Supply always explodes close to an important top. Governments, particularly in Europe and the USA have been rushing to issue as many bonds as possible as they attempt to absorb private sector losses. The penchant for 100-year bonds has multiplied with countries such as Mexico and companies such as Burlington Sante Fe choosing to lock in low funding costs for the very long term.
US Treasury yields displayed on this log scale chart clearly accelerated lower in 2008, falling from 4% to 2% in a few months. Base formation development appears to be underway and a sustained move above the 4% to 5% area would confirm a return to supply dominance beyond the short-term.
Chinese wages have bottomed and have seen double digit increases at least twice in the last year. Wen Jiabao announced a few weeks ago that China intends to eliminate poverty by 2020. This is a lofty goal but will require a significant rise in wages to achieve it. The cost of manufactured goods which has trended lower for nearly two decades has as a result probably bottomed. Rather than importing deflation, North America and Europe are now more likely to import inflation. Commodities are increasingly breaking out of inflation adjusted downtrends. So how does one protect one's wealth in such a scenario?
Globally oriented companies leveraged to the growth of the global consumer offer potential for capital appreciation as this theme gains wider acceptance. Within that group companies which pay a reliable dividend have a better chance of holding their value against the background of mounting inflation. While inflation is not a short-term concern, it has the potential to be a serious medium to long-term risk and yield will attract a premium in such an environment.
S&P attaches the "Dividend Aristocrat" designation to US companies in the S&P500 which have not cut their dividends for at least 25 years. They also compile similar lists for a number of other regions. Over the coming week, I will review the constituents of these indices starting with the USA tomorrow.
Eoin Treacy's view