The other day I was reading a column in the Financial Times that referred to a study by the consulting company Bain. Published late last year (I missed it then), it’s called A World Awash in Money.
Its basic premise is that the present condition of a “superabundance” of investment capital looking for a place to go to work is a permanent feature of the financial landscape. Therefore, asset prices will remain higher than the consensus expects; interest rates will remain lower.
Three factors are involved:
–financial innovation, high-speed computing and increased use of leverage have allowed the pool of investment capital in the advanced economies to expand at a very rapid rate over the past couple of decades
–during the same time, GDP in the US and EU has been growing slowly, providing fewer new investment opportunities, and
–emerging economies like China will soon turn from being capital users to capital exporters, significantly increasing the amount of global capital searching for high-return projects to invest in.
In Bain’s view, this situation will have a number of important consequences:
1. interest rates will remain (much) lower than the consensus expects
2. in a capital-glutted world, bubbles like those in 1999-2000 and 2006-2007 have a high chance of recurring. Therefore, investors must be ready to anticipate them and take defensive action
3. investors will be forced to consider projects with extremely long duration (think: 20 or 30 years) to achieve superior returns
4. the risks of investing in the developing world, where capital will be needed the most, will become more palatable to return-starved global investors
5. achieving substantial real returns will require that both portfolio investors and company treasurers abandon their buy-and-hold, long-only mindset and become more like hedge funds.
I always find studies like this one interesting. It’s not necessarily because they turn out to be correct. It’s that they force you to think about the “big picture” and form an opinion on important investment issues. In this case, it’s what happens if interest rates stay low.
I also find studies that argue, in effect, that the current state of the economic/financial world will persist for a long time to be particularly worrying. In my experience, most times they come just before some dramatic and unanticipated change.
My take on the Bain study tomorrow.