Investment | 21 September, 2018

Investors and the need of searching for value

Alberto Villasán Investment and Markets Director

In a context where it is not easy to find undervalued assets or assets with an interesting risk return scenario, we must strive to select the right investment opportunities searching for value. BBVA in Switzerland, in line with its focus on capital preservation and capitalizing assets in the medium and long term, believes that some specific assets are still attractive to investors.

Central banks and governments have been stimulating the economy for 10 years…

The 2008 crisis and the debt incurred by businesses, households and banks placed pressure on central banks and governments of the main world economies to apply accommodating monetary policies, by increasing public spending and reducing interests rates to negative or almost zero.

The monetary stimulus and public spending in the last 10 years have meant that the system is currently witnessing the highest injection of liquidity in its history, only comparable to the 1930s.

…which has led to a preference for risk assets…

At the same time, global investors have been able to rely on high liquidity over the last 10 years, which they have used to buy financial and non-financial risk assets and, as such, lead to an increase in the price of these assets. It should be noted that the appreciation of the US stock market in the last 10 years has been one of the highest in its history.

Investors have decided to buy risk assets at historically high prices instead of investing their capital in deposits or risk-free assets at rates close to zero or even negative.

… Thus increasing their value and reducing the expected yield.

This increase in risk asset prices to current levels has had positive effects, e.g. increased investor wealth, as well as negative effects, e.g. the expected yield of these assets is historically very low.

Investors need to be increasingly more selective in their investment decisions since the expected yield of financial and non-financial assets is much lower than in the past.

US corporate bonds with investment grade rating.

From our point of view, US corporate bonds offer one of the best investment opportunities in the medium and long term.

Increasing debt levels will put pressure on central banks to keep policy rates at very low levels. As such, the current increase in long-term US rates should represent a good opportunity.

Investors that buy US corporate debt of 5+ years’ maturity will benefit from annual yield in excess of 4% for the next few years, with very controlled volatility and risk of default as low as possible.

Today, very few assets combine such high expected yield and such a predictable level of certainty.