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Markets Need Capital, Investors Need Comfort

Despite all the headlines about risk and uncertainty – of which I have been a serial contributor – the world is flush with cash and ripe with opportunity. While the backdrop of this potential risk-reward trade off seems dire, especially with the return of economic nationalism, there are nevertheless many opportunities to bridge the “capital and comfort” gap. The first step is to identify which markets and which industries are investment grade, despite the potential political risk factors in a given country. Similarly, it is critical for investors to make risk and risk transfer a front-end determination as opposed to an investment afterthought. All of this, of course, presupposes a profound shift in attitudes in investment committees about what constitutes “investment grade” and “acceptable risk” in the first place.

It is said that risk can be measured, but uncertainty cannot. Chaos loves a vacuum and in uncertain environments capital flies to perceived quality and low risk environments. This flight occurs at the expense of yield, market share and market access. Needless to say, the void also comes at the expense of a first mover advantage, political influence and defending supply chains. This void is being filled by a multitude of actors, including sovereign wealth funds, venturesome corporate capital and other sources, such as bartering. This explains the insidious effect of low yield or negative yield investments in many advanced economies. Consider negative yield an emblem of the lack of imagination among many large asset holders, their general conservatism in their investment thesis, and a form of risk premia in exchange for forgoing market access. This phenomenon was at its peak during the Greek financial crisis, and many of the pre-conditions remain in place in continental Europe, which is breaking apart at the seams with the return of economic nationalism and populous sentiments. The question then is if long-range asset holders are prepared to except premiums or low to negative yield investments for the perception of safety, why are they not prepared to take market risks for which premium can also be attached?

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