A Shift Toward Real Assets and a Flight from Currencies?

In 2016, China will have bought more assets worldwide than the United States, with 200 billion dollars, compared with 180 billion for the world’s first economic power. What is impressive as well is the growth in buying, having doubled in comparison to 2015 (105 billion dollars). Chinese businessmen are investing everywhere – petroleum in Russia, mineral ore in Africa, football clubs in Italy (Inter Milan), airports in France (Toulouse)...

This appetite for real assets does not concern only China, and not only private investors, but also exporting emerging countries’ central banks, managing 10 trillion dollars in reserves (coming from their commercial surplus) and sovereign funds, worth 11 trillion dollars. There are two fundamental reasons that explain this evolution: one, oil-exporting countries must prepare for a world without oil and find other ways to grow (Norway, Emirates, Qatar and, now, Saudi Arabia) and, two, sovereign bonds, their main investment up to now, aren’t generating any yield with zero or negative rates being the norm.

We are thus seeing a selling move of American and European sovereign bonds by the emerging and oil-exporting countries, and a reorientation toward the energy, industrial, infrastructure and real estate sectors. This trend will “grow stronger in the future”, according to Patrick Artus. The amounts in play are staggering: those 21 trillion dollars in reserves and sovereign funds represent half of the public debt of OECD countries. Moreover, the selling of sovereign bonds pushes long-term interest rates up on this American debt, but not in the euro zone, due to European Central Bank’s quantitative easing (80 billion euro a month) program. Given that a sharp rise in long rates would jeopardise the financial system, the central banks will surely continue with their lax policies...

But beyond those economic reasons, we can’t help but see also the beginning of a flight away from the currencies. And, besides, those countries (China, Middle-East countries) are indeed big buyers of gold, whether through their people or their central banks. Gold is the real asset par excellence, but there isn’t enough of it to absorb this considerable mass of money, and those countries must also diversify their investments. Anyhow, the main international currencies (dollar, euro, yen) are no longer inspiring confidence with their sovereign bonds that yield almost nothing and have questionable worth, due to base rates at zero and incessant quantitative easing programs (US excluded, for now).

In the same way as an individual with tons of cash gets no yield whatsoever and, also, faces risks of his bank account being looted in case of a financial crisis (BRRD and Sapin 2 law for life insurance), large holders of currencies (exporting countries’ central banks, sovereign funds) are starting to understand they are stuck with a poisoned gift. The flight away from currencies has started, albeit slowly for now; real assets will see their prices go up some more, bringing their lot of bubbles (not in gold yet – go for it!), but any acceleration of this move could put the whole of the financial system under destructive pressure.