At least once a week, I get a question asking me to recommend a safe place to invest.
I can understand why. We’re in the midst of a pandemic, the economy is in a (hopefully short) depression, interest rates are at record lows, and the stock market is highly volatile and looks overvalued. No wonder people are antsy.
How bad is it? Consider this fact. Something on the order of $12 trillion (U.S.) is invested in bonds with a negative yield. That means people are putting money into securities that will pay less at maturity than the original cost. A guaranteed loss from the outset. Why do it? Because they can’t find an alternative that offers a safe and profitable return. At least this way they get most of their principal back — or so they hope.
Many of what were once considered safe haven investments look less attractive these days. Here’s a rundown.
Bonds. Most of the bond market has performed well so far this year (high-yield issues being the notable exception). But that was simply a knee-jerk response to the sharp and sudden drop in interest rates — bond prices rise when rates fall. Unless we head into negative territory, there’s no room left to cut. If rates start to edge higher, bond prices will fall. It’s a knife-edge situation right now, and certainly not risk-free.
REITs. Buy real estate. They’re not making any more of it. That use to be the mantra for investing in REITs (real estate investment trusts). But the pandemic and the resulting economic bust has changed people’s thinking. Now they’re worried about whether tenants can pay the rent. Shopping mall, hotel and office REITs have been especially hammered. The S&P/TSX Capped REIT Index is down about 23 per cent year-to-date as of the time of writing.
Bank stocks. Canada’s big banks are safe and solid, right? Yes, they are — but their profits aren’t. Bank earnings were hit hard by the sharp economic slowdown, low interest rates and huge loan loss provisions. The S&P/TSX Capped Financials Index is down about 14 per cent for the year. Bank stocks could be a bargain at this level but there’s more downside potential if the depression deepens. An opportunity, yes. A safe one? No.
Preferred shares. It used to be that preferreds were considered to be just below bonds as a safe haven investment. That was in the days when straight preferreds were very simple securities. They paid a fixed rate of interest no matter what happened, so investors could rely on them for steady cash flow. The price varied with interest rate movements, but the income was always dependable.
Then the banks had what they thought was a brilliant idea. They started to issue rate reset preferreds after the Great Recession of 2007-2009. The initial interest rate was in place for five years and was then reset using a formula based on Government of Canada bond rates. Eventually, these new preferreds came to dominate the market.
When rates started to fall, investors could see the reset yields would be lower, and prices fell dramatically. The average annual loss for the S&P/TSX Preferred Share Index over the past three years is 6.4 per cent. Since Jan. 1, it’s down 7.7 per cent. No safe haven here.
