Bernstein: Beware Credit-Related Assets As Bubble Deflates

Why are investors overweight credit-related assets as the expansion of credit unwinds and these assets underperform?

Editor, Europe
Reviewed by: Rachael Revesz
Edited by: Rachael Revesz

The number one macro issue that investors should be aware of is the continued deflation of the global credit bubble after the financial crisis of 2008, according to Richard Bernstein, chief executive officer of New York-based Richard Bernstein Advisors, who warns against credit-sensitive assets in your portfolio.

Speaking at the ETF-focused Capital Link conference in New York on 13 October, the author and commentator said that we are still undergoing the deflation of a bubble that started to build in 1998, which led to all credit-sensitive assets, like hedge funds, private equity and commodities beating the market.

“But now the global credit bubble is deflating so why overweight credit-related asset classes?” he asked. “People are still waiting for this asset class to come back and be the leader, but they have underperformed since 2008. They might outperform over a quarter, but the secular story is not about credit-related assets.”

Bernstein argued that China, emerging markets and the falling oil price are not the reasons for volatility in the market today, which peaked on 24 August. He said it boils down to two factors which affect equity prices – interest rates and earnings.

“The Federal Reserve threatens to raise interest rates and whenever they do that, that’s always a negative for equities,” he said.

However, the bull market continues as the rate-hike starts because profits are still increasing, and that positive effect temporarily outweighs the negative effect of rising rates, he said.

But with the S&P 500’s current earnings growth at negative 5 percent, Bernstein questions why the Fed would raise rates at a time of a "U.S. profits recession".

He forecasts U.S. profits to rebound slightly next year, signalling a continuation of the current bull market.

“If that happens and the Fed delays [raising rates] a bit, we will go back to the normal cycle,” he said. “But if profits get worse and the Fed raises rates sooner, volatility will continue. Just focus on that – everything else is noise.”


Rachael Revesz joined in August 2013 as staff writer. Previously an investment reporter at Citywire, she has a background in writing content for retail financial advisors and has covered a wide range of subjects in finance. Revesz studied journalism at PMA Media, which has since merged with the Press Association. She also holds a B.A. in modern languages from Durham University, as well as CF1 and CF2 financial planning certificates from the CII.