Growth is unequally distributed

Robert Weil, well-known financier and owner of Proventus, is concerned over the enormous debt burden that Western consumers and Western countries have run up. He sees no short cut out of the crisis and sees difficulties in giving investment advice in the current situation.

You have long been saying that Swedish investors have been focusing on shares and that bonds have been an undervalued investment form in Sweden. How do you see things today?

– “There is and has been an intensive focus on shares and too little interest in and knowledge of bonds. Over the past decade, those who have invested in shares have not been rewarded for the extra risks taken. Over the last century, the risk premium on shares has been around 5 per cent , but in recent years it has been near zero and it is of course unsatisfactory not to be rewarded for taking a risk.”

Why is that?

– “I think it's largely due to historical factors. When currency regulation was phased out, share prices shot up during the 1980s and 1990s. When the AP pension funds were given new investment instructions they had more opportunities to increase their shareholdings; but they should not have overlooked corporate bonds, which are an investment form between shares and risk-free government bonds.”

How do things look in other countries? Is there more awareness there?

– “Yes, in some cases, perhaps above all in the USA. The investment bank Drexel Burnham Lambert, which created the junk bond market, was very skilful in valuing bonds. It contributed a great deal towards vitalising and restructuring American business in the 1980s. Then they became careless, and they and the market nosedived. But the financing form and the knowledge remained, and made a comeback.”

After the Lehman crash, corporate bonds became popular in Sweden too. What happened after that?

– “After the crash of 2008, the bottom fell out - not only the share market, but also the corporate bond market were hit. Interest on corporate bonds with a degree of risk rose to between 15 and 20 per cent. And of course that made them attractive. Due to the increased demand, the corporate bond market recovered fairly soon and returned to a more normal level. We have seen similar situations, for example about 10 years ago, when ABB and Ericsson were in difficulties and the interest on their bonds reached levels between 15 and 20 per cent. Nobody paid any attention then.”

How do you look at the present situation with the big debt crisis in the West?

– “Historically, we have been used to growth benefiting wage earners. In the 30 years following the Second World War, well-distributed growth created affluence in the Western world that we have not been close to in more recent times. We also had a new situation where women entered the labour market: suddenly many families had two wage earners contributing to increased income. That period was a golden age for the growing middle class, and it in turn created increased purchasing power and increased taxable capacity. But in the last 20 to 30 years, distribution has changed and the wage earners of the Western world have not received their share of growth. Instead we now have heavily indebted wage earners and nations with economic imbalance where the tax base is insufficient to restore balance. Because of this imbalance there is no real possibility of increasing the tax levy on the majority of wage earners and, as we have seen in the past year, it has created a situation where most of the government bonds in the West world are no longer considered risk-free. Too many countries will find it difficult to increase their borrowing. The demographics, above all in Europe, are not improving the situation. European pension savings will be needed, and too little has been reserved for our future needs.”

Don’t you see any bright spots?

– “For a long time, company profits have been increasing more than ever, and company balance sheets are often excellent. Sweden and Germany are examples of countries which benefit and have benefited greatly from the robust investment demand, above all in the strong growth economies in Asia. In Sweden, our short-term strength is that our industry is more investment-oriented than consumer-oriented. This in turn should make us more resilient in a situation where the purchasing power of consumers in the Western world risks continuing to weaken. Long-term developments remain to be seen.”

Finally: if a good friend won a million today, where would you recommend them to invest the money?

– “Please – do I have to give investment advice? That's much too difficult...”

Interview by Jon Åsberg published in the Swedish weekly Affärsvärlden on 5 October 2011.

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