Stange behaviour in financial crisis could hide a warning

Fund manager RWC has picked out what it has called “thirteen bizarre goings on in financial markets” which it says should make investors wary.

Amongst the 13 oddities is the fact that many developed economies have never been in a worse position financially, but can still borrow money at lower rates than ever. For example, US government debt is higher than a decade ago, but the yield demanded by the market has fallen from 6.1% to 2%. RWC said another strange behaviour exhibited is that investors are buying corporate bonds from companies like P&G and McDonalds while selling the same companies’ equity, despite the equity dividend yield being higher than the corporate bond yield. Yet another concern is that investors such as Warren Buffet think that bonds are over-valued, yet most investors – including pension funds – are looking to increase their bond allocations.

The worrying signs of the times were compiled by Nick Purves and Ian Lance, of the RWC Equity Income Team, who describe themselves as value investors looking for strong free cash flows at the right price. They added: “The ECB, backed by European sovereign states, is lending money to European banks at 1% so that the European banks can lend money to sovereigns by buying government bonds of European states, or indeed, put it back on deposit with the ECB. Everyone seems to think this is great but when Bernie Madoff did it he was arrested.” They added: “Articles about how hedge funds swallow up 85% of their client’s investment gains in fees continue to appear alongside articles about investors’ intentions to increase exposure to hedge funds. Additionally, during the credit crisis, the ratings agencies rated over 50,000 subprime CDOs as AAA….and yet the markets still hang on their every word.”