Certain investments have become very popular in a post-Brexit world, and investors will want to tread carefully and be selective. Richard Turnill explains, with the help of this week’s chart.
Risk-on sentiment has dominated markets in a post-Brexit world characterized by expectations for lower-for-longer interest rates. This week’s chart helps illustrate the result: Certain investments have become very popular, and investors will want to tread carefully and be selective.
The chart below shows where the crowds are, based on our analysis of fund flows, fund positioning and price momentum. We consider positions with scores between 1 and 2 (and -1 and -2) as popular, and those with scores above 2 (and below -2) as very popular. The higher the score, the more popular the overweight is. The lower the score, the more popular the underweight is. The most popular investments today: overweight U.K. government bonds (gilts), emerging market (EM) sovereign debt, developed market credit and gold, as well as underweight eurozone equities.
Market Realist – Popular investments
The uncertain global environment created after the Brexit vote made investors hope for a perpetual low rate environment. Additionally, the prospect of further easing from central banks in the developed markets has spurred strong demand for government debt.
UK bonds see record-low yields
The demand for the UK government’s ten-year bond is so high that its yield reached an all-time low of 0.52% in August. Although the yield has since increased to ~0.66%, it fell by almost 3.5% in August and by 66.3% during the last year.
On the other hand, the demand for near-term UK government bonds maturing in March 2019 and March 2020 was so high that their yields entered negative territory in August.
Emerging market debt
The emerging market debt (EMB) also looks appealing due to rising credit quality on the back of an improving economy and higher yields relative to developed markets’ corporate and treasury bonds. EM debt (LEMB) has witnessed 18 billion euros in inflows during the first seven months of this year.
While most of the developed countries have lagged, developing countries like Venezuela, Brazil, and South Africa have posted higher returns in recent months.
Gold (IAU) is another popular investment destination this year, with prices surging by 25% YTD (year-to-date). Gold demand is primarily driven by investment purposes rather than for an aesthetic purpose.
According to the World Gold Council, gold demand increased by 15% to 1,050 metric tons in 2Q16 year-over-year. The total gold demand in the first half of the year surged to 2,335 tons, one of the highest in the first half of the year. Exchange-traded funds tracking the spot prices of gold recorded inflows of 580 tons.
Developed market credit
The corporate bond (LQD) (HYG) market is also one of the most appealing asset classes this year on the back of an intense search for high-yielding assets. According to Dealogic, the US investment-grade corporate bond issuance amounted to $60 billion in August, taking the total to nearly $550 billion this year.