Risks abound in uncertain world

Last week, investors paid the Italian government to take money off them.

Risks abound in uncertain world

A two-year bond sale was struck with an interest coupon of -0.023%, marking the lowest price Italy has ever paid for borrowings.

This remarkable event reflects the emergency condition that global central banks are tackling as they try to resuscitate economic activity.

Quantitative easing (QE) continues to form a key plank in monetary policy worldwide as a flood of inexpensive money courses through the banking system.

By providing liquidity at a low price (interest rate), policy-makers are betting that economies can be kick-started in to life.

The consequences of almost limitless money being provided at low cost are many.

On the plus side, it feeds through to cheaper funding for everyone from governments to companies and consumers.

At the moment, you can borrow two-year money off an Irish bank for 4.4%.

High quality companies are issuing debt on international bond markets at a cost close to 2%.

These supplies of cash are helping encourage investment in houses, factories, and, ultimately, jobs.

While these are all positive consequences, you do have to wonder what all-time low interest rates tell us about the underlying health of the economic patient.

With headline GDP growth showing good signs of life in big economies such as the UK and US, why are rates not moving back up to more normal levels?

If economic growth is improving, why is inflation non-existent?

The concern must be that underneath the global economy, something is awry.

If the world tips into recession during 2016, a projection becoming more prevalent in economic research currently, what weapons have central banks left to fight it with?

With the money taps fully on, and the cost of that debt ultra low, it will be hard to find new levers to pull.

With government debt worldwide already at relatively high levels, it is unlikely that widespread tax cuts can be approved.

If central banks were gun-slingers, their holsters have fallen down and the Smith & Wesson will be empty next time El Bandito rides in to town.

It is against this backdrop that investors must navigate.

With inflation close to zero, and interest rates the same, a gain of over 1% would be, in fact, a measure of wealth creation.

Those who backed the Iseq index in 2015 have recorded a return of 20%, a sharp out-performance of global indices such as the Ftse (-3%) and Dow Jones (0%).

Next to bond returns, these Irish equities have delivered a huge bounce, helped partly by the recovering Irish economy but also by further progress from those companies building international businesses.

The challenge, now, is to find assets that can keep investors ahead of the curve as the global economy enters a new year.

This is where an investor’s appetite for risk is tested.

If you have limited confidence in how the world will unfold next year, then a portfolio made up of low-yielding bonds, low-risk companies with dividends attached and a smattering of cash is probably sensible.

If you have had full exposure to the Iseq this year, then a result in 2016 that protected your gains would leave you probably 10 times ahead of inflation in the 24 months between January 2015 and December 2016.

For those with a tolerance for risk, the shape of their portfolio will reflect exposure to companies which have solid growth plans that plan to convert into higher profits and growing dividends.

Making choices around these various options is akin to playing chess with the market, or maybe it is a snakes and ladders board game.

Either way, skill, luck, and perseverance are the hallmarks of a successful investor in a troubled world.

Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal.

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