The currency depreciation war is active and alive (below is a chart of the US Dollar to Chinese RMB exchange rate, showing a 3% devaluation over the past couple days which is historically quite volatile for the currency):
We’re entering into a strange topsy-turvy financial world where things are going to stop making much sense at all. We already have that in Europe, where a lot of sovereign bonds are trading at negative yields (which is the definition of financial insanity).
Interest rate futures for the US federal reserve already show that the fed funds rate will slip down to about 1% – the December 2020 fed funds futures are a full percentage point below the present values. The Bank of Canada will likely be forced to match to some degree – I would look for the Bank of Canada to drop their rates correspondingly.
In terms of investment themes, always keep in mind TINA – There Is No Alternative – as safe bond yields get pushed into the low single digit yields, in order to make any returns at all, the risk frontier continues to get pushed further and further into the equity realm. Dips in equity valuations will eventually be bought as pensions and institutions need to seek returns that they are not going to be receiving from bond portfolios. Specifically, domestic industries (i.e. no China exposure) with cash flow pricing power will remain king.
The allure of leverage (why not when you can borrow so cheap?) will also be tempting.
Unfortunately, a lot of these companies (e.g. most utilities) already trade rich, but there’s a decent chance that the escape for safety will continue to push asset prices even higher.
Also, with medium-term interest rates declining, those 5-year rate reset preferred shares will also likely take a hit. There may be some interesting opportunities coming up in this space as shares get sold off.
Have about 25% cash currently. Looking to deploy.