Among the assets under scrutiny are emerging-market bonds, which for only the third time in history are yielding less than U.S. junk debt.
An A-list cast of investors have publicly denounced emerging market bonds as too risky and over priced. When you get an A-list cast of people doing anything in finance you should be sceptical: it moves markets. In fact, it opens them up to accusations of collusion and market manipulation, although I don’t know of any charges of this in the past.
Think about it. When Ray Dalio, or Warren Buffett, or whoever it happens to be, comes out and publicly denounces an asset class it’s going to start an avalanche. Novice retail investors that aren’t sure how the market works sell off their positions, shortly followed by more sophisticated retail investors who react to the price dropping, thinking the influencer called the top of the market. Institutional investors with tough risk management mandates, like insurance and pension funds, are forced to begin dumping their positions in reaction to this minor movement, which leads to a much larger and sharper movement. Institutions with looser risk strategies like some hedge funds liquidate, banking their losses immediately. Automated systems see the sharp dip and liquidate immediately. The price tanks, the circuit breakers trip on the exchange, and everyone talks about how prescient Ray/Warren/whoever was when he said this asset was about to dry up.
Anyway, the point is emerging market bonds might be overvalued or a bunch of influential investors might be short them.
Speaking of being sceptical of financial advice from strangers here is an article from an investment blog claiming emerging markets — especially Chinese equities — were the best performing major asset class this month, yet again.
Sounds promising. The author also makes a case for Japanese equities, who have been held back by forex rates since 1989, is about to break out. This seemed legitimate right up until this line.
This is no ordinary year.
This is a year that ends in a 7, and those aren’t too bullish historically speaking.