When central bankers embarked on their money-printing activities, they had no idea of the unintended consequences that they would cause. Or maybe they did. The idea behind Quantitative Easing was an admirable one. It was meant to improve the flow of money around global economies by making banks stronger and more willing to lend. Clever Experiment It was also intended to drive down interest rates, which it did. We probably can’t even begin to imagine the devastation that could have been wreaked on global economies if the former chairman of the Federal Reserve, Ben Bernanke, had not come up with…
When central bankers embarked on their money-printing activities, they had no idea of the unintended consequences that they would cause. Or maybe they did.
The idea behind Quantitative Easing was an admirable one. It was meant to improve the flow of money around global economies by making banks stronger and more willing to lend.
It was also intended to drive down interest rates, which it did. We probably can’t even begin to imagine the devastation that could have been wreaked on global economies if the former chairman of the Federal Reserve, Ben Bernanke, had not come up with the clever monetary experiment.
However, not all the newly-created money went to where it was intended. Some of it ended up in global bonds such as US Treasuries and UK Gilts, which pushed down interest rates. But as the yields on those bonds started to look relatively unattractive, investors looked overseas for better returns.
Today, the yield on US 10-year Treasures, which is generally regarded as a proxy for a risk-free investment, at 2.5%, is not too dissimilar to the return on UK 10-year Gilts. A 10-year Singapore bond will yield 2.45%.
In fact even 10-year Spanish bonds yield 2.2% and 10-year Italian bonds yield 2.4%. Gone, it would seem, are the premiums that investors demand for assuming extra risk, thanks to the creation of free money.
Meanwhile, if you stash your cash in short-term deposits, you are likely to be more disappointed than a person who lost a dollar and found ten cents.
Short-term rates in the UK are as low as 0.5% but that is still better than in the US, where interest rates are at 0.25%. You could get 0.05% in Germany and nothing in Japan. Better rates of 8% are on offer in Russia, while Argentina and Venezuela are offering 18%. But there are good reasons for those two countries’ ultra-high interest rates.
Elsewhere, property has become almost unaffordable for many. In the UK, a typical property in central London has hit a new high of £401,000. According to a recent report, property prices in countries that include the UK, Hong Kong, Singapore, Canada and even New Zealand could be overvalued by at least 25%.
But there are scant signs that prices are likely to come down significantly as cash-rich investors continue to chase a safe home for their money.
With three of the four main asset classes looking either deeply unattractive or in some cases almost unaffordable, that leaves only equities. But even here, cheap money has effectively pushed prices higher.
In the US, for instance, it would seem that every new trading week nudges the stock market to another new closing high. But there could justifiable reasons for that. In the US, where $19 could buy $1 of company profit, the earnings yield of 5.2% is still better than the other asset classes.
A similar argument can be made for UK share, where the earnings yield of 6.3% trumps bond yields. Meanwhile in Singapore, the Straits Times Index (SGX: ^STI) is valued at around 14 times earnings. In other words, you could theoretically buy one dollar of profit generated by the 30 blue chips for $14.
It would appear, therefore, that the stock market bull-run could still have some way to go. But while capital gains might be of paramount importance to some investors, it should not be the be-all and end-all consideration.
Warren Buffett once said: “Think carefully about what the asset is capable of producing rather than where we think prices are going. Focussing on the former is investing, while an obsession of the latter is speculating.”
With that in mind, think carefully about the cash-generating properties of the asset class that you would like to invest in. Look for those assets that can sustainably deliver inflation-beating returns over the long term.
For some, a low-cost stock market index tracker such as the STI ETF (SGX: ES3) could fit the bill. But better returns could be on offer with some individual shares because not every stock has risen with the tide of money that has flooded into the market.
This article first appeared in the Independent on Sunday.
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