The Market Conundrum

The current market conditions are making it hard for investors to invest in reasonably priced assets that can generate adequate yield. The fixed income markets are expensive, the equity markets are at all time high, with the exception of the recent drop in the big four banks’ shares, and the commodity markets has been recovering slowly with the boost from oil recovery.

There are important drivers that affects these markets and influence their prices in a way that we are currently observing.

One of the key factors is simply Central Banks. Central Banks control the interest rates through monetary policies to control or stimulate the economy through money supply. As an investor, the benchmark for what you can get in the future for a dollar paid today is the risk-free rate. The risk-free rate has a major influence on other investments.

In an effort to stimulate the economy, Central Banks around the world including Europe, Japan, US and China are cutting the cash rate to increase the money supply. As such, the yield on treasury bonds declines and the bond prices go up.

Bonds are currently expensive and do not represent an attractive investment vehicle. Equity markets has the same story. Housing prices are increasing as well. The commodity markets have been suffering from negative returns and the list goes on.

The situation might seems gloomy, however, since the Global Financial Crisis the markets did not experience much volatility except for instances here and there. And hence traders and investors are looking for new avenues to chase yield.

Global hedge funds and money managers are cautious on where to invest as it is easy to buy but not as easy to get out. Investments seem risky especially with the anticipation of when the central banks will start to hike up interest rates. Some are hoarding cash, in anticipation and to avoid risk; others are looking at the emerging markets such as Brazil for opportunities. Goldman Sachs, for example, have been investing heavily in tech-startups. Will there be a market correction where the overpriced equities and bonds get cheaper? Sure.

Simply put, mean reversion where everything goes up must come down will take place and overpriced assets will revert to the mean as history shows.

In my opinion, the best application for the current market conundrum is to apply fundamental analysis when choosing to invest and to ignore the market noises. Perhaps one of the options for the lay investor is investing in start-ups through equity crowdfunding platforms.  

Choosing a project to invest in relies on different factors including one’s understanding of the industry and the product.

Ideally one should choose investments that are related to one’s expertise to identify the appropriate investment risks and avoid having a negative returns.

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