Churchouse Letter
August 2015           by Peter Churchouse

The Biggest Market You’ve Never Heard Of

And how now you can (and should) strongly consider it for your portfolio...

A long-closed market is now opening up to individual investors.
And it has the potential to provide us with income, capital gains, low volatility and great diversification.
This is a fantastic opportunity to add an investment to your 'safe income' portfolio... these kinds of recommendations are tough to find, so make sure you give this one plenty of consideration.

In my five decades in Asia, I’ve wracked up my fair share of air miles – as I’m sure have plenty of readers. As regional specialists in a continent filled with close to 50 countries, we flit from airport to airport, city to city, hotel to hotel.

We’re the modern nomads of the business world. When I was a young man, I loved it. Here was this Kiwi from a nation of 4 million wandering a part of the world that holds 60% of its population. Everything was new.

It only takes a whiff of that cloying, sticky scent of the durian to cast me back to my first trip to Kuala Lumpur and a brief wander through its Chinatown. Likewise, I’ll never forget the fetid smell the first time I passed by a polluted klong in Bangkok. That initial sighting of thousands of bicycles whistling through the streets of Beijing is etched into my brain. And walking through the slums of Calcutta 30 years ago, I simply couldn’t believe the depths of poverty surrounding me…

Thankfully, as you get older, the travels become more for pleasure than for business. Life slows down. But two important lessons stick with me from those whirlwind business trips.

First, when you’re trying to pack more Vietnamese dong into your wallet than it can possibly fit, you realize you are thankful to be earning money in a strong currency, one that generally holds its value and doesn’t turn to toilet paper overnight. Second, wherever your travels may take you, it’s always good to find a safe haven in the evening, a place where you’re sure you can sleep securely and peacefully overnight.

In this issue of The Churchouse Letter, I want to explain to you just how a strong currency, coupled with an extremely secure asset, will help you get that hard-earned sleep. This time around, I want to explain not how you’re going to triple your money in a few weeks – but how to maintain what you’ve got and even enhance it a little bit.

I’m hardly in my dotage. Asia still lays a few surprises on me now and then. But I’m not kidding myself either. When it comes to my finances or my travels, I can’t take on the kind of risk I used to as a young man.

There’s good reason, particularly now the Western world’s central banks are so hell-bent on ruining everyone’s savings by printing money, to keep a decent portion of your portfolio in a secure, yield-generating bolt hole. The trick is to identify one that is priced in a currency that looks guaranteed to give you more bang for your buck, and that will spin out cash way more regularly than you’ll get in British gilts or U.S. Treasuries.

Thanks to recent changes, the market has a new sweet spot that can deliver exactly those characteristics. Read on, and I’ll tell you why.

The Largest Market You’ve Never Heard Of

You could call this the ultimate sleeper market – we have been following it for some time, but have never written about in our published material.

To be honest it wasn’t worth writing about before. As recently as a year or so ago you simply couldn’t access this market in a way that I would recommend.

Now you can. And you need to strongly consider it.

Why?

First of all, let me say this: you’re not going to double your money on this investment any time soon. This is at the other end of the risk-reward scale. The risk is right down there. But the reward is better than any other comparable market.

We all love the idea of a “50% gain in six months!” play. But there are times when a good low-risk, low-volatility income-producing opportunity arises. It’s something that every investor’s portfolio should contain.

Is this a small market? No. Far from it. In fact it’s the third-largest of its kind in the world. Its total size is close to US$6 trillion today – roughly one-quarter of its U.S. equivalent.

Is it a growing market? Yes. That US$6 trillion today was just US$1.5 trillion in 2006.

This off-limits market is opening rapidly to foreign capital and will continue to be easier and easier for us to access.

This market is going to suck in hundreds of billions of dollars over the next few years. Possibly more. It will be on the radar of every global fund manager.

And it won’t just attract fund managers. It will be a market where governments all around the world will want or have to invest. Sovereign wealth funds and pension funds will hold large positions. International agencies such as the International Monetary Fund and the World Bank will also be active here.

This is a very liquid market with a trading volume of around US$57 trillion in 2014, and growing rapidly.

It is a market that has intense and deep support from the national government and its central bank. There are very sound economic and political reasons for this.

Mr. Bond – With a Very Different Accent

By now you have probably guessed that the country we are talking about is China. And you may well have followed that train of thought and realize it leads to its bond markets. More specifically, the government bond market.

So why put Chinese bonds in your portfolio?

There are a lot of reasons.

First, let’s just take a look at the big picture. We all know that China is now the world’s second-largest economy. But foreigners cannot invest openly in China’s equities or bonds.

It is getting easier, but China is still not totally open. Not by a long shot.

Today the U.S. economy is 68% bigger than China's.

But The Economist recently forecast that China’s economy will be 49% bigger than that of the United States by 2050.

Yes, that will take time, but the transformation is happening at a faster rate than anything we have ever seen in modern history. Within 10 to 15 years China's economy will be cruising past the United States.

(As an aside, I should point out that four of the world’s five biggest economies will be Asian by 2050, up from two today.)

It is inconceivable that the largest economy on the planet will not play host to trillions of dollars in investment from around the world. There is no way that the largest economy in the world can close off its equity and bond markets to the rest of the planet.

It has to open up – and plans are firmly afoot to make that happen.

The Indispensible Bond

Bonds deserve a place in any internationally diversified portfolio. Most money managers would argue that such a portfolio should contain 30% to 70% in bonds. That is a big spread, I know. But it depends on the investor’s age and risk appetite, the desire for reliable income, and home currency.

Personally, I have always been at the low end of the bond spectrum. That is because of my personal bent to owning and managing real-estate portfolios.

Typically, younger investors have a higher risk appetite and allocate only a small amount to bonds and other fixed-income instruments. Older folks will possibly increase the bond component and reduce the higher-risk equity components.

So the story is that we pretty much all need to be invested in bonds to some extent.

But where in the world would you really want to invest in government bonds right now? Think about that from a risk, volatility, yield and currency perspective.

How about Europe?

Well, sovereign bond markets there are about as close as they can get to being in a true bubble (take a look at our earlier piece “A Lesson From the Mountains”).

As an investor, you have to pay some governments for the privilege of holding your money!

Yields are generally derisory and no longer reflect risk in any real sense.

Why would I buy Spanish or Portuguese sovereign bonds that give me a miserly spread over safe German government debt? These countries have been at the edge of the financial precipice. They are still far from being in the clear on matters of debt, growth, and default risk.

And that is before we mention the currency risk.

The euro has depreciated against the U.S. dollar by 18% in the past year. Any yield or possible capital gain has been more than swallowed up by the currency drop for a U.S. dollar-based investor.

Bonds in commodities-based markets such as Australia, Canada and New Zealand were popular bets for bond bugs for quite some time. Yields in these markets do still have some attraction. They are higher than markets in Europe. But again, investors have taken a beating on the currency.

The Aussie dollar has fallen 33% from its high point in mid-2011. The Kiwi decline has been even more rapid. It has tumbled 22% in the past 12 months.

In a world of zero interest rates, finding yield has been a real mission for conservative investors. Even high-risk equities and bonds have seen yields get crushed. All those conservative savers have been beaten up by central banks that have pushed rates to the floor.

It is the “good” people who have borne the brunt of this. They invested year after year in pension funds and insurance policies that were going to deliver them modest but safe income when they retired and needed a steady supply of cash. And now, suddenly – surprise! Those savings simply aren’t going to be able to do that.

Baby Boomers who thought they were going to be safe and secure as they went grey now have another very good reason for their hair to turn colour…

However, safe, highly rated government (or quasi-government) bonds in China will give you a yield in excess of what you will find in most sovereign bonds in the developed world.

Why You Should Meet Mr. Bond Today...

 

Learn how to "meet Mr. Bond" and enter into the world's largest unheard of market.

If your portfolio needs an investment that offers you 3 ways to make money:

  • with income,
  • currency appreciation,
  • and capital gains

Then purchase your subscription to The Churchouse Letter and discover what Peter has unearthed in this month's edition.

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