Investors are moving into riskier assets they wouldn’t have previously considered as low rates …

BlackRock’s Isabelle Mateos y Lago told Bloomberg on Wednesday that low interest rates are pushing investors in search of yield to riskier assets than …
BlackRock Mateos y lago

Bloomberg TV

  • BlackRock’s Isabelle Mateos y Lago told Bloomberg on Wednesday that low interest rates are pushing investors in search of yield to riskier assets than they would have previously considered.
  • The strategy chief sees investors moving into illiquid and alternative investments, and “these are investments that they would have never contemplated historically, because of their risk parameters.”
  • Traditional safe haven assets no longer provide a portfolio with yield or resiliency, Mateos y Lago said.

Low-interest rates are causing investors to buy riskier assets than they normally would seek out, according to BlackRock’s Isabelle Mateos y Lago.

The global head of BlackRock’s official institutions group told Bloomberg on Wednesday, “Portfolio construction is being completely taken back to the drawing board because people understand we’ll face these low interest rates for a long, long time into the future.”

Mateos y Lago said she’s seeing global investors and asset owners move away from traditional safe-haven assets and into riskier ones like illiquid investments, alternative investments, high-yield bonds, and emerging markets bonds, particularly from China.

Read more:UBS says investors need to diversify away from Big Tech — and shares 3 strategies that will them stay on top of the next phase of the market’s recovery

These assets are providing yield, but “for a lot of asset owners, these are investments that they would have never contemplated historically, because of their risk parameters.”

Traditional safe-haven assets no longer provide a portfolio with yield or resiliency, she added.

“You obviously always need some safe government bonds in a portfolio, but the notion that they’re going to play as big a role as they did in the past when rates were much higher and you had both yield and protection — that idea is fanciful,” the strategy chief said.

Read the original article on Business Insider

Opinion: Zombie companies are proliferating — here’s how to keep them out of your stock portfolio

Stick to mainly mega- and large-cap stocks and seek out ‘runners’ and ‘fighters’. AFP via Getty Images.

There are investments lurking in portfolios today that, if left unaddressed, may wreak havoc on longer-term investment returns. Zombie companies — those with excessive debt levels and failing business models — are presenting new and unforeseen challenges for investors.

Read:Schwab’s Liz Ann Sonders: Stock market today is ‘a small handful of winners and a heck of a lot of pain’

Minimizing zombie risk

In the first half of 2020, the number of zombies more than doubled. In certain sectors, this trend has become even more pronounced: The tally of energy and consumer discretionary businesses that fell into the zombie abyss tripled over that same time period. Smart investors have already seen that across the entire corporate landscape, technological changes and shifting consumer preferences have rendered many business models obsolete.

Fortunately, there are ways to minimize the risk of ill-fated zombie businesses to one’s portfolio.

First, with this pandemic-induced environment in mind, it’s worth putting into perspective the impact of zombies by simplifying the equity universe into three types of companies: runners, fighters and zombies.

Runners, in short, are growing companies in growing markets. The most visible examples are the mega-cap technology firms. But runners exist in other markets, too. They can grow in a Covid-19-infected economy and can do so profitably. Even as some runners risk growing too large and attracting attention from regulators, they’re making life worse for the zombies, with every percentage point of gained market share coming at the expense of these companies.

Fighters are those companies battling for, and winning, market share in flat or low-growth markets. Fighters may have growth-like characteristics or may trade at low valuations. They’re not limited by geographic or size distinctions. Technology and a landscape permanently altered by Covid-19 are presenting new opportunities for these companies to reinvent themselves through innovative customer experiences, for example. Large retail brands featuring a direct-to-consumer relationship and omni-channel capacity are illustrative of fighters finding new life in a challenged space.

Which brings us to the zombies. Losing share, losing pricing power and being kept alive by debt servicing, zombies ultimately cannot cover their cost of capital. Fundamentally, zombies lack a path to profitability.

The pandemic has accelerated the zombie’s demise, and certain industries have become more infested with them. The energy sector, particularly exploration and production firms, are plagued by low prices, weak demand and leveraged balance sheets. Banking, already squeezed by a diminishing branch footprint, has been negatively impacted by the flattening yield curve, a record-low rate environment and stagnating loan growth. The communications industry is also a breeding ground for zombies, as shifts in consumer preferences for content, including more customized streaming options, have made legacy structures obsolete.

One obvious question arises about zombie companies: How long can they survive? It depends, but a zombie’s negative impact to your portfolio can last for years — and the issue is exacerbated by today’s monetary environment. Even as their fundamentals decay, zombies continue to shuffle forward, underperforming the market and introducing unhealthy competition to the real economy. The wave of monetary stimulus since the 2008-09 financial crisis has made access to capital historically easy, providing fresh food (cheap debt) to the business model with no future.

Next steps

So, in this uncertain world, how should investors manage the risk posed by these fundamentally doomed companies? As policy decisions drive market performance and prop up failing businesses, investors must carefully assess the characteristics of their holdings to discern the living from the living dead.

First, go big. We believe an overweight to mega- and large-cap firms (Russell Top 200 Index, Russell 1000 Index) will shift equity holdings to a significantly safer neighborhood than the more zombie-populated small-cap universe (Russell 2000 Index) can provide. Certainly, there are plenty of large-cap zombies as well, but the likelihood of being exposed to a failing company is higher in small-caps.

Next, seek runners and fighters. Finding long-term winners in the current environment is a difficult undertaking, but rigorous analysis can help uncover fundamentally good business. For example, maintaining an equity bias toward growth characteristics could help limit zombie exposure. Even within the much-maligned value equity universe, looking for stocks that can grow profitably — by gaining market share or by building brands — often distinguish the runners and the fighters from their doomed peers.

Finally, play offense in fixed income. Yes, fixed income proved to investors in 2020 that credit can, and will, break out of its lower-volatility slumber quickly in response to new information. That said, we’ve seen a remarkable normalization in the level of volatility in fixed income markets, and we see opportunity in investment-grade and preferred securities as an effective means of driving additional risk-adjusted yield. Within high-yield fixed income, zombie risk is best addressed with an active approach that limits potential drawdown risk from zombie surprises.

Within the credit universe, to identify those industries with the highest incidence of zombie companies, we review several criteria including debt interest coverage. When examining this metric within the high-yield market, the consumer-discretionary and energy sectors show the highest prevalence of zombies, while in the investment grade credit space, energy and industrials show the most extensive occurrence of zombies.

By taking steps to minimize the negative impact of zombie companies, investors will be better positioned to navigate financial markets as this exceptional time unfolds.

Todd Jablonski is chief investment officer of Principal Global Asset Allocation at Principal Global Investors.

Is the September Stock Market Correction Over?

… today which tells me, investors are nervous in spite of the slew of good news with the Nvidia (NVDA) merger, vaccine hopes, and a China rebound.
nasdaq price performance versus stock market indices september investing image

Although a 10-15% stock market correction is normal, the bigger question is whether the bounce we just saw from recent lows is a sell rather than buy opportunity?

Both the Nasdaq 100 and S&P 500 Indices are trading into resistance.

For the S&P 500, that number is 342. For the Nasdaq 100, we are looking at 282.

The Dow Jones Industrial Average has to hold 28,000.

Interestingly, volatility also closed green today which tells me, investors are nervous in spite of the slew of good news with the Nvidia (NVDA) merger, vaccine hopes, and a China rebound.

Furthermore, the Federal Reserve meeting minutes will be released Wednesday.

The expectations are for a dovish stance.

What interests me is what they say about their plan for getting inflation up, which has yet to be defined.

Is there a possibility of another severe market correction this year?

Without a stimulus plan from the government, although I believe it will happen in the final hours before the election, the stock market will get hurt.

Plus, the election and rising protests could hurt if the violence increases.

Moreover, a second wave of COVID is the most frightening possibility.

So, what should investors watch for now?

The outliers are still the best “tell.”

Junk Bonds (JNK etf) have to hold around 104.80. High grade corporate bonds (LQD etf) should hold 135.50.

Perhaps the most important outlier is what happens to the dollar. A move in DXY or the dollar continuous contract under 92.80 could spark more buying in the commodities, but also more fear about the recent rally in the Chinese Yuan.

Volatility is yet another key as the index held the 50-DMA and over 26.00 could be an early warning sign.

For now, I am still very bullish in gold, silver, and miners.

I am also watching, with no position, a bullish bias in uranium and natural gas.

If the market holds, I still like some of the small cap growth stocks.

For example, I am watching Fastly (FSLY) for a move back over 84.00.

Otherwise, please watch the indices carefully here and if they start to rollover, I would raise stops and take profits on the winners.

Trading Levels for Key Stock Market ETFs:

S&P 500 (SPY) 342 key resistance to clear 338 support then 333

Russell 2000 (IWM) 153 pivotal 150.75 key support

Dow (DIA) 280 pivotal 274 key

Nasdaq (QQQ) 282 resistance 275 support 272 must hold

KRE (Regional Banks) Could not confirm a recuperation phase so back to bearish

SMH (Semiconductors) 171.50 support 175 resistance

IYT (Transportation) Strong relative to the other sectors. Must hold 200

IBB (Biotechnology) Sitting right on the 50-DMA at 135.90

XRT (Retail) 49.00 the 50-DMA

Volatility Index (VXX) Eyes here tomorrow especially if VIX clears 26.00

Junk Bonds (JNK) 104.80 support

LQD (iShs iBoxx High yield Bonds) 135.50 support

Check out this video I did with The Dollar Diva (Debbie) from September 14:

Twitter: @marketminute

The author may have a position in the mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

Investment Strategy In Government Bonds

It is hard to say how much investing in government bonds will help your pension portfolio, but there are some unique benefits for those willing to take their time. Those who invest in individual bonds can often choose between 1 – 2 bond funds or buying in a broker account. If this seems too complex to broaden your investment portfolio, or if you don’t want to use a financial adviser as a guide, there are two other ways to add fixed-income instruments to your investment. Buying bonds in the form of a government bond fund or private equity fund can be a headache, and consulting a qualified asset manager can help you choose the best approach to take now. [Sources: 7, 8, 9, 18]

Like shares, government bonds can be held and sold to other traders on the market. Investors can also buy government bonds on the secondary market from banks and brokers who buy them directly from the government or from a bank or broker in exchange for government bonds. [Sources: 10, 13]

If you need short-term investment grade bonds, you can buy ETFs in the same way as government bonds. You can reduce your risk by combining a government bond portfolio with a portfolio of other high-quality bonds, such as equities or bonds from other countries. [Sources: 7, 17]

If your main strategic objective when taking out bonds is diversification, you can choose an active or passive bond selection strategy. Investors seeking capital preservation and income diversification can simply buy bonds and hold them until maturity. This approach has the potential to lead to long-term investment in government bonds and other high-quality bonds. [Sources: 12, 16]

Since bonds with longer maturities typically have higher interest rates, this strategy involves investing in long-term bonds. Treasury bonds carry the risk that interest rates will rise over time, reducing the value of the bond. [Sources: 1, 11]

For example, if you want to buy a home in 15 years, you can schedule your Treasury bond investments to match the time you expect to need the money. If you choose to capitalize on higher returns by investing more in government bonds, your position as a Treasury bond could be diminished in the future when yields return to normal. This strategy could be considered first for conservative investors – investors who are unsure how to invest but want a predictable plan for working until retirement age. [Sources: 9, 10]

Investors looking for the traditional benefits of bonds can also choose a passive investing strategy that seeks to match the performance of bond indices. This includes buying and holding bonds until maturity or investing in bond funds or portfolios that track bond indices. Diversification is key – if you are only interested in Treasury bonds, you should diversify as much as possible to stay fully invested. An iShares Treasury Bond ETF (ETF) can help investors maintain their exposure to the Treasury bond market. [Sources: 2, 8, 16]

While a passive strategy involves investing in selected bonds, an active strategy requires an individual bond selection to track the performance of the index. [Sources: 12]

Investors looking for a safe investment with high returns would need a minimum investment of £1,000 in return for flexibility. Corporate bonds can be bought on the Retail Bond Platform on the London Stock Exchange. You don’t have to access your money until the bond matures, and the fund is within the FDIC’s $250,000 limit. [Sources: 3, 15]

They can buy Treasury bonds managed by the Federal Reserve Bank of New York, the US Treasury or the Treasury Department of the Secretary of State. [Sources: 1]

For most retail investors, the best way to invest in these bonds is to buy TreasuryDirect bonds or ETF bond funds. While you can buy government bonds directly from the US government, most bonds must be purchased through the Federal Reserve Bank of New York or the Secretary of State’s Treasury. Because government bonds are better valued and represent a safer and safer investment, traders who prefer riskier investment strategies may prefer high-yield bonds to government bonds. Investors who want to diversify their bond holdings may need to take a little more risk to get involved, but forget higher returns. [Sources: 0, 4, 6, 15]

This type of bond is well suited – for purchases – and – holding strategies, because it minimizes the risk associated with embedded options that are included in the bond issue contract and remain with the bonds for life. [Sources: 14]

Buying government bonds typically carries little or no default risk, but when the bond is traded on the open market, it can lose value when interest rates rise above the face value of the bonds. When buying individual bonds, investors want to manage their interest rate risk by diversifying the maturities of their bonds. This strategy involves an investor buying longer-dated bonds rather than medium-term bonds, a financial asset invested in long-term government bonds that are limited by the government’s bond issue contract and its maturity date. We begin by looking at two types of government bonds: sovereign debt and sovereign equity. [Sources: 3, 5, 7, 18]

Sources:

(0): https://www.cmcmarkets.com/en-gb/trading-guides/invest-in-bonds

(1): https://www.fool.com/investing/how-to-invest/bonds/treasury-bonds.aspx

(2): https://www.blackrockblog.com/2020/06/02/trending-now-treasury-etfs/

(3): https://www.asktraders.com/learn-to-trade/stock-trading/how-to-buy-government-bonds/

(4): https://www.wellsfargo.com/goals-investing/investing-types/bonds/

(5): https://buckinghamadvisor.com/you-can-be-too-conservative-051313/

(6): https://investinganswers.com/articles/bonds-101-how-navigate-complex-world-bonds

(7): https://www.bankrate.com/investing/how-to-invest-in-bonds/

(8): https://www.fidelity.com/learning-center/investment-products/fixed-income-bonds/bond-investment-strategies

(9): https://www.sdmayer.com/insights/blogs/wealth-management/is-investing-in-government-bonds-a-smart-move-sdm/

(10): https://www.acorns.com/money-basics/investing/long-term-treasury-bonds/

(11): https://www.wiseradvisor.com/article/bond-strategies-for-various-financial-goals-235/

(12): https://saylordotorg.github.io/text_personal-finance/s20-03-bond-strategies.html

(13): https://tendercapital.com/en/what-is-the-difference-between-government-bonds-and-corporate-bonds/

(14): https://www.investopedia.com/articles/bonds/08/bond-portfolio-strategies.asp

(15): https://www.realwealthnetwork.com/learn/safe-investments-with-high-returns/

(16): https://www.pimco.com/en-us/resources/education/everything-you-need-to-know-about-bonds

(17): http://www.dvzcpa.com/investment-strategies.php?item=83&catid=28&cat=Investment%20Basics:%20What%20You%20Should%20Know

(18): https://www.forbes.com/advisor/investing/how-to-buy-bonds/

DeFi Yield Farming Is Driving Adoption, but Stakeholders Urge Caution

Three years on from the initial coin offering mania of 2017, decentralized finance is the new hype. Spurred on by the promise of high annual gains, …

Three years on from the initial coin offering mania of 2017, decentralized finance is the new hype. Spurred on by the promise of high annual gains, traders appear to be sowing heavily in crypto’s latest yield-generating arena that is DeFi. Projects in the early days of crypto seemed to focus on payments and finance in general; however, entrepreneurs began expanding the utility for blockchain technology into other use cases with varying degrees of success.

With DeFi, an argument can be made that crypto is returning back to the promise of democratizing finance. By eliminating the need for traditional gatekeepers, global financial inclusion can reach a more diverse demographic.

DeFi evolution has seen decentralized exchanges experiencing greater trading volumes, with lending and money market protocols attracting increasing investment. Over the past few weeks, however, yield farming has taken center stage, with investors eager to provide liquidity for DeFi projects in exchange for high-yield governance tokens.

Amid the growing popularity of yield farming, also called liquidity mining, some industry observers say the trend is only a fad that will inevitably slow down, while DeFi proponents argue that rising prices are irrelevant and that the focus should instead be on the robust financial systems being created.

Liquidity mining

DeFi lending protocol Compound kicked off the yield farming frenzy back in June. At the time, the project introduced a new token distribution mechanism that rewarded liquidity providers with COMP, a governance token for the Compound platform that gives tokenholders the ability to vote on protocol-level issues affecting the project. In no time, the price of COMP rose meteorically, ushering the current yield arbitrage gold rush.

As of the time of writing, Compound’s total value locked (TVL) is over $770 million, according to data from DeFi analytics tracker DeFi Pulse. In mid-June, this value was about $100 million, indicating that the project has grown almost eight-fold in barely a month.

Total value locked (USD) in compound

Apart from providing percentage yields and governance tokens for users, liquidity mining creates a positive use loop for DeFi protocols. Usability has often been the bane of DApps, with projects unable to retain their customers beyond a certain timeframe. With yield farming, however, lenders and borrowers can earn incentives for participating in the market. Thus, it has become common to see investors deposit tokens, borrow other coins and move their positions across different markets, depending on the arbitrage opportunities available.

Yield stacking has become the latest iteration of the liquidity mining process whereby investors borrow from one platform and deposit in another project multiple times to increase their overall gains. Stacking yield is also allowing traders to earn several governance tokens from their expanded portfolios.

In its recently published“2020 Q2 DeFi Industry Research Report,” TokenInsight reveals that whales have earned over half of the COMP mining rewards. Also, the report indicates that centralized lending platforms are getting in on the liquidity mining action as well, with Nexo having deposited over $60 million in the stablecoin Tether (USDT) to farm COMP governance tokens.

DeFi startups like Instadapp are even creating tools that streamline the yield stacking process to allow investors to efficiently utilize their trading capital. Given the low float of these governance tokens, it’s perhaps unsurprising to see them experiencing substantial price gains.

Another “ICO-type” mania?

The expiration of the distribution phase of tokens like COMP might alter the current economics of the yield farming market. Investors apparently aware of this reality are no doubt looking to be first-movers in this new arena and reap the benefits that accrue for traders who front-run any prominent niche in the crypto space.

Thus, it is most likely that market participants who missed out on the initial gains for projects such as Compound and Balancer will be on the lookout for the next project to kick-start its own liquidity mining phase. The likes of Ren, Synthetix, Curve and even flash loan platform bZx are thought to have liquidity mining plans in the pipeline. Commenting on the difference between the current yield farming buzz and the ICO mania of 2017, Johnson Xu, head of research and analytics at crypto analytics platform TokenInsight, remarked:

“I believe the DeFi yield farming craze is fundamentally different compared to the 2017 ICO craze. In the short term, the high-interest rate and the incentivized liquidity mining mechanism has created a hype in the space which directly pushes up the DeFi market, resulting in a speculative push in the DeFi space. Without any further applications and use cases to be created in order to accrue meaningful value within the space, we believe the recent DeFi hype could be short-lived.”

For Xu, the significantly higher entry barrier into the DeFi space compared with the 2017 token sale era will incentivize efforts geared toward robust market development in the former. While the current euphoria might echo the “pump and dump” cycle common in the ICO space, DeFi participants appear to be working toward creating tangible value for the industry as a whole.

Stani Kulechov, CEO of DeFi lending protocol Aave, also echoed Xu’s sentiments, highlighting the fact that the current high yields are incentivizing greater participation. Commenting on how the yield farming hype differs from the ICO craze, Kulechov told Cointelegraph: “2017 was different in the sense that people were throwing funds into anything, whereas in DeFi you cannot be DeFi without having such characteristics such as non-custodial protocol.”

The curious case of yEarn

To buttress the earlier point about investors being on the hunt for the next liquidity mining opportunity, consider the case of yEarn, a yield aggregating protocol developed by Andre Cronje. As previously reported by Cointelegraph, despite Cronje warning that its YFI governance token was of little value, investors still flocked to the platform, triggering a single-day price run of 4,000%.

YFI was even listed on the automated market maker platform Uniswap. As of the time of writing, data from crypto market monitor CoinGecko shows YFI listed on exchanges such as FTX and Poloniex. Worth $30 upon the project’s launch, YFI token price surged to $4,661.97, an increase of about 15,400% in barely a week. Cronje told Cointelegraph: “I was not expecting this at all.”

Investors earn YFI tokens by providing liquidity to a suite of projects under the aegis of the yEarn protocol. The system functions as a market monitor that provides information about the DeFi protocols offering the highest yield, updated in real time.

According to an announcement published on July 24, yEarn is set for its “version 2” roll-out in the next couple of days. As part of the announcement, the project said the update will solve issues concerning the rigid nature of the first iteration. The second version of yEarn will comprise three main components: yVaults, controller and strategies. With yVaults, investors will be able to track the share of their tokens in any liquidity pool.

The other two components — controllers and strategies — allow traders to create a subset of governance protocols aimed at obtaining the highest yield in the market and maximizing returns with as little capital loss as possible. According to the announcement, yEarn v2 will eliminate entry barriers to investors with relatively small capital exposure, stating: “The system is designed to be gas efficient for small yield farmers, allowing deposits and withdraws as low as ~$2 even at 100 gwei.”

Is yield farming a problem for DeFi?

The hype surrounding liquidity mining on Compound saw the project briefly overtake Maker as the largest DeFi protocol by TVL. Currently, yEarn is the ninth largest, ahead of others such as dYdX and Uniswap. Given the nature of the mania surrounding crypto’s new yield-generating machine, some pundits are drawing parallels with the ICO craze of 2017. If liquidity mining is the new ICO, then TVL is the new market capitalization in that its growth creates an initial positive loop that spurs further participation from investors.

However, the increase in TVL in the first instance is due to investors banking on the promise of high annualized yields from providing liquidity to these DeFi protocols. As long as governance token prices continue to increase, traders seem incentivized to keep on lending and borrowing, stacking yields in the process.

It took 20 days from the total DeFi TVL to move from $2 billion to $3 billion. In less than a week, the DeFi market is already 57% of the way from the $3 billion mark to the $4 billion valuation mark. With such accelerated growth comes concerns over whether the DeFi market is battle-tested enough to handle stresses on it. Responding to this question, Cronje opined:

“The Defi market has this interesting concept where you ’vote’ with your funds. So, you ’vote’ for the protocol you think is safe with your LP funds. The onus is shifting to the owner of the funds and away from the protocol. LPs need to be much more aware of where they are putting their funds. If not, it will be an easy breeding ground for scams, much like the ICO craze.”

For TokenInsight’s Xu, the risk is not an alien concept for crypto participants, adding that yield farming still needs to be tested by the broader market, as there are significant risks around smart contracts and the market in addition to infrastructure failure, among other factors. Xu added:

“I strongly suggest DeFi projects do not jump the gun to simply offer attractive yield farming to attract users and capitals. I think the most important aspects in the DeFi space is to build a solid infrastructure and token economy with a proper incentivized mechanism to create a ripple effect in the industry.”

According to Xu, the growth in the DeFi space is only beginning, as TVL will continue to increase, attracting more investors. As previously reported by Cointelegraph, institutional investors are beginning to turn their attention to the DeFi market.

Related: Key Metrics Show Institutional Demand for Bitcoin Is Surging Rapidly

With investors eyeing high yield potential, Cronje argued that the focus should move toward sustainable gains. Commenting on the potential implication of the current state of the market, Cronje stated: “I know ~10% APR doesn’t sound as good as 1000% APR, but that’s the sustainability. The yield obsession while fun, could cause damage in the long term if not handled correctly.” Aave’s Kulechov also made a similar point about de-risking the DeFi space. In a Tweet published on July 22, he called for an emphasis on “safety farming” where the focus would be on incentivizing activities that do not endanger the stability of the market.