Time to invest
If the empirical evidence is not enough to convince you to invest, then let self-preservation be your motive. As far as can be observed anecdotally, the bond market has served only to make the most experienced and seasoned investors look foolish.
Indeed, we have been guilty of that at Brewin to some degree. The challenge this presents is bonds make you look the most foolish just when you need to look clever.
Furthermore, in a recent fund manager presentation at a major investment seminar, the audience were confronted by a slide pack titled ‘the dangers of traditional bonds as your fixed-income exposure’. It is not that their economic view was particularly spurious; indeed, it was very similar to Brewin’s, which is exactly the issue.
Bond funds positioned for economic recovery shall fare well in such an environment, boosting portfolio returns. However, should the very real possibility of a recession transpire, and deflationary pressures (further) grip, then ‘alternative bond strategies’ will compound losses.
This is not what portfolios need, and monies deployed to such strategies must be done so with great care and attention to risk management. In fact, we are minded to inform the fund manager in question to reconfigure their slide pack under the heading ‘the dangers of having non-traditional bonds as your fixed-income exposure’.
Bond uncertainty
Solely from my own observations, most investors are underweight bonds based on fears of a narrow valuation methodology; choosing to ignore the fundamentals and portfolio construction benefits. The bond market remains a confusing if not worrying place. Roughly half of all government bond yields are negative. This makes bond indices longer duration which, in turn, makes them even more sensitive to interest rates. Capital losses are now greater ‘should’ yields rise.
However, if 10-year gilts were to join JGBs, Swiss bonds and (effectively) bunds on negative yields, holders will enjoy double-digit returns. This is not a bad outcome, especially in an environment where equities might be struggling.
Clearly, yields have also been on a meltdown of late, and the base effects of a capitulating energy market on the inflation calculation should stabilise over the year; however, market timing has always been an exercise in futility. If you are underweight, buy bonds today.
