Saturday, 13 December 2008

Stores of value

I was pondering stores of value the other day. Like many, I am more worried about deflation than inflation, and that make identification of stores of value more difficult.

Let's start with what does not work. Property, clearly, isn't a good idea. (I might make an exception for agricultural land in an unfashionable part of the country with legal restrictions which make it impossible to develop - and hence make it cheap.) I won't consider anything in dollars or yen, as the former is likely to plunge, and I have been consistently wrong about the latter. Commodities are falling, art is worse, and most of the hedge funds will be gone by tea time.

So, we are left with Euro or Sterling bonds and precious metals. I can see the case for gold, but I'm not a gold bug, and given the run up since 2002, it feels expensive. Euro assets do too, for a sterling investor. Perhaps short dated genuinely AAA credits (IBRD, for instance, or KFW) in EUR are worth considering for a really safe haven, but I wouldn't go out long term. That leaves GBP bonds as a store of value.

The sterling curve is reasonably steep out to 4 years, and flatter after that. That suggests keeping your duration short, especially as rate rises might be only a year or 18m away. Or perhaps sticking with good quality Libor floaters for the moment. So that was my depressing conclusion. Buy AAA Libor floaters in sterling, with a side order of agricultural land and a small allocation to short dated supranationals in Euros, with the FX at least partially hedged.

Risky assets are a lot easier. A first to default note on national champion banks should give some extra juice, and a short on life insurers with significant exposure to guaranteed annuities is an interesting token equity play. But it is the `preserve value' part of the strategy that's difficult, not the `take risk' part.
For that latter I might even throw in a short USD position too. But with a tight stop-loss. But for the former, I'm really struggling.



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