According to European Wealth’s, Nigel Marsh the group has been underweight bonds for a number of years, but decided at its latest investment committee meeting to further dramatically reduce its remaining exposure.
But he added, the decision was not a result of a single catalyst, but rather a culmination of a number of things.
“Bonds have done well, QE is stopping or about to stop in both the US and the UK and there is a possibility of a return of some wage inflation, for those reasons we don’t like bonds at all. And, especially in the higher yielding areas, you are taking maximum risk for very minimal reward,” Marsh said.
In lieu of the corporate bond allocations, Marsh said, the money has been moved into short duration, low volatility fixed income funds.
“This whole exercise is to further de-risk the portfolios, rather than an effort to make a return,” he said.
Asked if European Wealth’s concerns were primarily around liquidity within the market or whether the concern was around a bubble forming, Marsh said European Wealth’s view was that the market has been driven by a large amount of inflows on the back of QE and many of the people behind those inflows
“have not properly thought through the risks involved.”
“It is a very crowded trade, in some areas of the market there is a bubble being built, one that has been driven by QE,” Marsh said.
Rothschild investment strategist Kevin Gardiner, however, take a slightly different view. While he agrees that bonds are expensive, especially in the corporate space, he does not believe they are in bubble territory.
That said, Gardiner added that he had been surprised by the severity of the falls seen in October.
“The activity in October reinforced our view that it is not a good idea to try and fine tune one’s market calls too closely because there is a lot of noise. But, what it did demonstrate to us was that liquidity in the bond markets is perhaps not what it once was.”
He added: “Both the Bank of England and the Federal Reserve own very large chunks of the bond market, and they are not going to be sellers any time soon. Likewise the large pension funds aren’t often big sellers of the longer-dated bonds, which means the float, especially on government bonds is not perhaps as big as people imagine.”
“Much of the investment grade corporate market is fiercely expensive, we are not worried about default but there does remain interest rate risk,” he added.
