There is a 5 - 10% chance that the US government may actually default on its debt on 17 Oct. Meanwhile, the correction of stock markets worldwide has made some markets cheap again. I'm buying into European equities because the MSCI Europe's Cyclically Adjusted PE ratio or "CAPE" is around 13x vs the median of 15x. S&P500's CAPE is around 18 - 20x so it's in the expensive zone. I've sold off my US funds and moving into Europe ETF, Aberdeen European Opportunities for my CPF account and Blackrock European Equities for my cash account.
I'm staggering my purchases in Asia x Japan and Emerging Market equities. Basically, in view of this threat of default, I will buy one tranche now and another tranche after the issue is temporarily resolved.
Even if the US does default in the 5% probability, there is a 4.9% chance that it will quickly make good the coupons a few days after 17 Oct. and a 0.1% chance that it will default permanently. You must know that the US still has its financial fate in its own hands, because ALL its government debt is denominated in USD. Why issue other currency debt when the whole world uses USD as the de facto currency? So it could theoretically print as much money as it wants.
In the longer term, investors may shift focus to German Bunds and Japanese government bonds because they are also AAA rated. Australian government bonds could also gain in attractiveness. Already, the German 10 year bunds is at 1.8%, lower than the equivalent UST's 2.6%.
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