They say that beauty is in the eye of the beholder. When it comes to investing, beauty can be seen as an opportunity. It’s also important to see opportunities from both sides: some opportunities are there to be taken whilst others are to be avoided.
Often these opportunities present themselves when emotion gets the better of sensibility. When this happens, irrational behaviour becomes common place and assets transfer hands at unsustainable prices. Remember Rio Tinto trading at over $120 and Flight Centre below $4?
I can see two areas of the market currently where irrational pricing seems to be taking hold. The first is oil prices, while the second is Australian Government Bonds.
The plummeting oil price has been all over the news recently, and from much of the media coverage you would be forgiven for thinking this is not a good thing for the economy. In some cases, it is even sparking fear of global deflation. Whilst deflation is not an impossibility, I believe that it is highly unlikely that it will take hold in any meaningful manner. Common sense says we live in a world where people want to make more money, not less. Simplistically speaking, to make more money you have to put prices up, not down. This is inflationary pressure, not deflationary. So, in the long term you would expect the price of oil to go up not down. The irrational behaviour really becomes evident when it is widely considered that the majority of global oil producers are not profitable at $50 per barrel. Look for the opportunities.
Definitely the lesser known irrational pricing is evident in Australian Government bonds. It does not make sense for someone to invest in a bond when you can get a better return from keeping your money in the bank. There is currently a significant yield gap between Australian Government Bonds and Bank term deposits over the same term. The yield on government bonds have now fallen below the current RBA cash rate on terms out to seven years and even a 10 year bond is only offering a yield of around 2.6%! Also, bear in mind if rates do go up then you also stand to make a capital loss. A week can be a long time in the investment market so 10 years will seem an eternity. To me, this seems like almost a sure way to lose money.
Beware of irrational pricing and seek professional advice before making decisions.