We see this particularly in the case of the European commercial banks; eight years after the crisis, they are still struggling with bad debts. They have been feather-bedded by the European Central Bank and national Governments have failed to act (with a few notable exceptions). Capitalism hasn’t been allowed to work and the problems have persisted, limiting the scope for a meaningful recovery.
Investors and their advisors who care about risk-adjusted long-term returns have a difficult course to steer. That risk/reward chart has changed significantly; I wonder how many of those in the business of measuring and analysing risk have adjusted with it.
Yields on government bonds have risen over the past couple of months but it is not clear that the long trend downwards in yields has been broken. Nevertheless, there is a clear change in mood and an increasing risk of rising inflation. We have been discussing this possibility and adjusting our portfolio for some time. We would suggest that there may be painful times ahead for those unwilling to adjust to this new reality.
