If you focus on the downside risk, the upside return will take care of itself




Friday 16 January 2015

Risk run off mode

In this environment of ever decreasing bond yields, decreasing commodity prices and increasing margins and equity multiples I find myself in a clear risk run off mode as the risk - reward for many equity securities I look at just aren't attractive enough to make me deploy capital. Sectors such as energy are currently being investigated and small investments are being made here. I continue to buy bonds, recently adding to a healthcare businesses senior bond whose junk rating hides its excellent cash generative ability. A 4% yield in USD for a 6 year bond is attractive for me - as I feel the large debt burden of many developed markets will not allow them to raise rates significantly, if they do. Meanwhile commentators argue if rates will rise in Q2 or Q3..... The way I see it interest rates in USD are not likley to average more than 2.5% over the next 6 years. Hence a 4% yield over that period is an attractive premium if I am satisfied with the credit risk of the issuer and feel inflation is likely to average below 2.5%. I think this is likely at the moment.