It is that time of the year when the winter weather starts to recede and give way to the warmer months of spring. In sharp contrast, investors searching for yield on their investments, find themselves facing an Arctic cold. Not long ago in 2018, going into 2019, we had believed that yields were making their return, as the US started slowly to shore up interest rates, and Europe seemed to be tinkering with starting to prepare to follow suit. 

With the benefit of hindsight, we can see the central bank authorities are forthcoming when it comes to cutting down interest rates, but not the other way round. Despite that this narrative is subject to interpretation, by comparison to previous historical cross-sections of the market cycle, interest rates have remained too low for too long. In the last weeks, interest rate reductions by the US Federal Reserve and the ECB committing to further accommodation, almost reversed all the gains made since recession. 

Unfortunately, many have started to conclude that the effectiveness of monetary policy, has become in-elastic. This should not come as a surprise as in theory such accommodative policy is meant to be used for a limited span of time to stimulate the economy, before being normalized again.

Moreover, it is to be understood that monetary policy is not a magic pill to solving all economic ills. This approach has provided unprecedented stability (albeit last few weeks turmoil) in the market, however this falls short of eventually addressing.

In the long run it is going to take much more than monetary policy to re-ignite the growth factor in economies. The simple fact that the current low level of borrowing costs are not enough of an incentive, to instill, capital investment, indicates policy makers will have to look elsewhere if they are to achieve their goal. Despite this, we as investors will have to face this music for quite a long haul, and whilst we are at it, we may try to take the best stances in making the most from our buck. 

At this phase of the cycle, it would be prudent to hold credit of shorter duration. In this way, our investor mitigates shocks related to possible sudden changes, which could impact yields - at the same time the current low yield environment reduces the risk of re-investment, which takes us to our next point which is the importance of liquidity.

The importance of having an allocation to liquid capital is important at this late stage of the economic cycle. This allows the investor to be able to take hold of opportunities, as they arise. It is unfortunate to see investors not able to reposition their portfolios due to lack of liquid capital, which could result into missing of buying in a specific time frame. It is especially important to remember not to chase high yields.

Selection of credit becomes more challenging at this part of the credit cycle as, it is more difficult to recognize the good apples from the bad ones, due to the compression of yields. Despite this, credit, with strong fundamentals may provide a decent yield and downside protection in a downturn.

Having said this, it is important to stress out that, investors should be thinking about protecting their capital. It's clear that a sentiment of uncertainty will persist in the market. This calls for investors to shield their gains, through high quality, sovereign and corporate credit. This may not reward us, in the short term but it carries out the job of protecting the investor from the downside risks. 

So, wrapping it all up, I am afraid that this winter of yields has still some way to go. However, we can weather this frost ahead, through the ideas mentioned in this article. Remember investing is a game of patience and diligence, and like our lives it moves in cycles. Always seek the advice of your financial professional before taking investment decisions so you can safely thread this season.

Disclaimer: Daniel Gauci is a financial advisor at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, views and opinions provided in this article are solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.