Has a bubble really built up in bonds - and how can expats protect themselves?

The Bond market has never looked more bubbly - the iShares Barclays Aggregate Bond ETF (AGG) generated a cumulative total return of more than 23% since the end of 2008. Commodities guru Jim Rogers has tried, at least twice that I know of,  to short bonds (and lost each time). In the men time, sovereign bond yields continue to go lower, the 10-year US Treasury bond yielding around 1.7%, Germany's 10-year yielding around 1.3% and Japan's about 0.6%. In Europe inflation for April fell to 1.4% (per Eurostat) further keeping bond yields low and inflating the bond bubble further. Bill Gross of PIMCO, in his latest newsletter has advised his investors "to continue to participate in an obviously central-bank-generated bubble but to gradually reduce risk positions in 2013 and perhaps beyond" - which is quite possibly the best advice you can use today. My only additional comment would be to reduce risk positions - not gradually as Bill suggests but to do it as quickly as possible. A well structured offshore bond will be the best vehicle to do this.

Thanks to proposed ECB negative deposit rates Euro may go through a massive drop - what should expats do?

Austerity obsessed ECB lowered its main interest rate this week from 0.75% to 0.5% but along with this cut caused a stir about whether the bank might also cut the deposit rate, taking it into negative territory (which would mean banks having to pay for leaving money in the facility and would ostensibly push banks to lend more rather than hoard cash). ECB dropped hints on the negative deposit rates to express their frustration with banks that are hoarding cash and not lending. Clearly at the ECB, the money printing carrot does not seem to be enough to revive the moribund European economy so now this stick has been added to the equation. The unintended consequence of these negative deposit rates would be to put enormous downward pressure on the Euro jeopardizing the value of Euro denominated assets. Expats should look at reducing this risk by diversifying their portfolio through exposure to US dollar denominated assets. The most suitable vehicle for this type of optimal diversification would be an offshore bond.

Long term prognosis for the Indian Rupee is abysmal - time to increase exposure to US dollar denominated assets

The Reserve Bank of India (RBI) clearly fears inflationary pressures in India to the extent that it cut the repo rate only by 25 basis points today disappointing markets. RBI governor is quoted in the Economic Times as saying that "Conditional upon a normal monsoon, agricultural growth could return to trend levels. The outlook for industrial activity remains subdued, with the pipeline of new investment drying up and existing projects stalled by bottlenecks and implementation gaps." Persistently high current account deficit, credit growth falling to the lowest growth rate in over a decade, and now the RBI's own admittedly hawkish stance on inflation only add to an abysmal prognosis for the fate of the Indian rupee. Expectations that the Rupee will hit 60 to the US dollar are steadily rising. Government Pollyannas still try to come up with creative explanations to invent a growth story (see video).



As long as the RBI's Liberalised Remittance Scheme is still available to Indian residents, Indian or NRI investors are strongly urged to increase their portfolio exposure to US dollar denominated investments. You only have yourself to blame if your net worth significantly falls due to a sliding Indian rupee.

Comparing FDI into India with inward migrant remittances paints a truer picture of where Indian economy is headed

India received a total of US$69 Billion in remittances from NRIs and other overseas Indians in 2012 making India the leading recepient of remittances from overseas. This covered almost 40% of the merchandise trade deficit in 2012. During the April-February period of 2012-13, FDI into India declined 38% to $20.89 billion as compared to $33.49 billion during the same period of the previous fiscal year. Sectors which received large FDI inflows during the 11 months of 2012-13 include services ($4.74 billion), hotel and tourism ($3.21 billion), metallurgical ($1.39 billion), construction ($1.26 billion) and Pharmaceuticals ($1.11 billion). India received maximum FDI from Mauritius ($8.97 billion), followed by Japan ($2.11 billion), Singapore ($1.98 billion), the Netherlands ($1.67 billion) and the UK ($1.06 billion). These figures paint a completely different picture of the Indian economy and where it is headed. Thank God for the migrant remittances, it is essentially helping reduce the Indian current account deficit (CAD).



Also, the fact that Mauritius is the leading FDI investor into India (which is essentially laundered money moving out of India and back into India through the Mauritius channel) tells us that the media hype we usually hear about all the FDI interest in India is essentially bogus. The falling FDI rate into India tells us that investor confidence in India still remains very low. Thus, it is essentially the migrant remittances that is keeping the Indian rupee afloat. If one day the migrant remittances start falling, India's CAD will balloon beyond repair and send the rupee into a free fall. For the next few months leading to Indian general election scheduled for 2014 very strong caution is advised.