What it means
The phrase was a political slogan before it was a market one, and it entered investing conversations when interest rates were very low for long periods. If government bonds and bank deposits pay close to nothing, investors who need a return, such as pension funds and insurers, are tempted to buy riskier assets.
Shares are the obvious choice. The effect shows up in valuations.
When there is no attractive alternative, investors are willing to pay more for each dollar of company earnings, which pushes up the price-to-earnings ratio. A share that would look expensive when bonds pay 6% can look fair when bonds pay 1%.
Finance teams see this in several places. The cost of equity used to value projects can fall, the market value of the company can rise with no change in profits, and investors may ignore risks they would normally punish.
Boards sometimes read a high share price as proof of performance, when part of it comes from the low-return environment. The risk is that the support disappears when interest rates rise.
As bonds begin to pay more, investors compare them with shares again, and prices that depended on the absence of alternatives can fall sharply. The change is often quicker than people expect.
A simple way to test the idea is to compare the earnings yield of the stock market with the yield on safe government bonds. The earnings yield is earnings divided by price, which is the inverse of the price-to-earnings ratio.
If the gap between the two is wide, shares look more attractive than bonds, and TINA is a strong force. TINA is a description, not a law.
Investors always have alternatives, including cash, property and private investments, and holding cash is a decision to wait. The phrase captures a mood, and moods can change quickly.
In practice
Real-world examples.
Example
A pension fund with a target return of 6% finds that its safe bonds pay only 2%. The trustees increase the share of equities in the portfolio, reasoning that they have no other way to meet the target without taking more risk.
Example
A saver with $50,000 in a bank account earning almost no interest buys a fund of company shares for the first time. The saver admits that the main reason is that cash is not paying anything.
Example
A company chief financial officer notices the share price is high and decides to issue new shares to fund an acquisition. The finance team warns the board that part of the price reflects low interest rates, so they limit the amount raised.
Formula
Calculation
Earnings yield = earnings per share / share price = 1 / price-to-earnings ratio
Yield gap = earnings yield - government bond yield
Suppose a stock market index trades at 20 times earnings, and a safe government bond pays 2%.
Earnings yield = 1 / 20 = 5%.
Yield gap = 5% - 2% = 3 percentage points in favour of shares.
If the bond yield rises to 5%, the yield gap falls to 5% - 5% = 0, and a share priced at 20 times earnings no longer offers extra reward for the extra risk. Many investors would then sell shares to buy bonds.Case study
Seen in the real world.
Summit Vale Insurance is an illustrative, fictional insurer that needs to earn 5% on its investments to pay future claims. For years its bond portfolio yielded 1.5%, so the chief investment officer gradually moved money into shares and higher-risk credit.
The risk committee became worried that the portfolio's performance depended on the continuation of low interest rates. It tested the portfolio against a scenario where bond yields rose by three percentage points and share prices fell 20%.
The illustrative result was a $60 million fall in the value of the investments, equal to 12% of its $500 million portfolio. The committee decided to reduce the share allocation and to build a reserve, accepting a lower expected return in exchange for resilience when the support from low rates faded.
Watch out
Common mistakes.
- Treating TINA as a permanent condition, when it depends on interest rates staying low.
- Assuming high share prices are always justified by strong profits, when part of the price can reflect the lack of attractive alternatives.
- Believing there really are no alternatives, when cash, bonds, property and other assets are always available.
Questions
People also ask.
What does TINA mean in investing?
It means investors feel forced to buy shares because other assets, such as bonds and savings, offer very low returns.
What ends a TINA market?
Usually a rise in interest rates, which makes bonds and savings more attractive and gives investors a reason to move away from shares.
Where does the phrase come from?
It was used as a political slogan before investors borrowed it to describe markets in which shares seemed the only sensible choice.
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