The price of safety and the value of distress Johannes Visser
RE•CM Investment manager of the Nedgroup Investments Managed Fund
‘Risk is not inherent in an investment; it is always relative to the price paid. Uncertainty is not the same as risk. When great uncertainty drives security prices to especially low levels they often become less risky investments.’ ‘The single greatest edge an investor can have is a long-term orientation.’ - Seth Klarman A flight to safety has pushed up the prices of typically low risk asset classes to levels where they have become risky and have beaten down the prices of many high risk investments to a level where they offer relatively more long-term protection in real terms. Great uncertainty in the Eurozone is leading to massive risk aversion among global investors. Investors are fleeing risky assets like equities and seeking safety in what is traditionally considered low-risk investments like government bonds and cash. But the risk of any asset - the probability that it produces a permanent capital loss and the magnitude of such a loss – is not only a function of the general characteristics of the asset and the prevailing fundamentals. It is most significantly a function of the price paid relative to the value received. With ‘low risk’ investments currently in high demand and ‘high risk’ investments being avoided at all costs, ‘low risk’ investments have become less attractively priced and more risky and ‘high risk’ investments have become more attractively priced and less risky.
Chart 1: US and German 10-year Government Bond Yields and European Stock Market Earnings Yield 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0
US 10 Year Government Bond Yield Source: Thomson Reuters Datastream
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