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In the years since the global financial crisis, institutional investors have flocked to a handful of havens where they could wait out the storms with their capital more or less intact. But it is these hiding places – including U.S. Treasuries, corporate debt, German bonds and the must-own emerging markets like Mexico – that now pose some the biggest risks.

Gold, long regarded as the safest of havens and still a significant piece of many a diversified portfolio, is already on that slippery slope and has more room to fall, says Alain Bokobza, the head of global asset allocation with Société Générale in Paris.

The others will follow as monetary policy is tightened in the face of sturdier economic growth, Mr. Bokobza said the other day during a visit to meet institutional clients in Canada and the U.S.

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It goes against our instincts to shy away from growth stories in stable markets like the U.S., which appears on track to a sustained recovery. "Normally, you are attracted by growth. So you should be naturally invested in countries where you do have growth," Mr. Bokobza said. "I think it is an error. My thesis is that the growth drivers are not good for financial returns."

His antidote is to seek out former darlings such as China, parts of the euro zone, and Brazil, where growth has been slower and returns uninspiring, but where policy changes are in the wind.

Simply put, stronger economic expansion inevitably translates into lower expected returns, while weak GDP performance leads to measures that produce the opposite effect. "Higher growth means tightening of monetary policies or less ample liquidity conditions," he said. Which means risk premiums will be going up and returns down.

That will certainly be the case in the U.S., where the Federal Reserve is preparing for its well-telegraphed shift from tapering to tightening, probably by the middle of next year. That policy sea-change – which Mr. Bokobza describes as "a game-changer" for investment managers – seems likely to spark an exodus out of U.S. corporate debt and overvalued equities. It will also strengthen the U.S. dollar, just one more headache for fanciers of gold and less precious commodities to ponder.

The flip side of that proposition is that lower growth levels in troubled countries "trigger the capability to loosen monetary policy. More liquidity in the financial system triggers higher than expected returns."

Brazil ranks high on his list, because current conditions and a presidential election coming in October open the door to just such a scenario. For now, Brazil's central bank is "acting as a Valium, with very high interest rates to prevent speculation." It has also managed to knock out the economy.

But that will change. "The market consensus is that the politicians are very weak and fiscal spending will continue to grow," Mr. Bokobza said. That, in turn, would force the central bank to resume tightening, taking its benchmark rate to 13 or 14 per cent (from 11 per cent), more than double the inflation rate.

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But he predicts that regardless of who wins the October election, the next move for Brazil will be to rein in fiscal policy that was loosened to cover the huge infrastructure expenditures needed to prepare for the World Cup.

"If we introduce politics and game-changers in the panorama, then it is a must to anticipate that there will be a change in economic policy" toward fiscal tightening, along with a loosening of monetary policy and an injection of liquidity into the financial system to revive the sedated economy.

Investors who still like the tattered Brazil story will be hoping he's right.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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