While that growth scenario would be unfavourable for government bonds, Bowie thinks it would still be possible to earn 3-4% from the right kind of investment-grade bonds, which in his view are short-dated, BBB-rated bonds.
“Both the Corporate Bond and Absolute Return funds are heavily weighted to short-dated BBB bonds. Many of these have yields of 4-5% and because they are so short-dated, even if yields rise a bit, it won’t impact their total returns very negatively.”
Even with Brexit and Trump, warts and all, Bowie would rather invest in the UK and US for riskier credits than in Europe.
As far as the UK is concerned, he offers a bold view that “Brexit still has the potential to be a positive for the UK, even if we don’t get free trade with the rest of Europe.”
He says: “The worst-case scenario in most people’s minds is that we leave the single-market and go to WTO rules. But from what I’ve read, that will result in an average tariff of about 4%. Given the pound has weakened by 15%, we are still up on the trade by more than 10%, even if we get no concessions on trade from Europe.”
Looking ahead, he reiterates that it is possible to keep duration low but still have very attractive yields and returns in an environment where government bonds might be rising modestly. “Income is a scarce commodity currently but fixed income is traditionally the best source of income and will continue to be. But no question, there are reasons to be worried about certain areas of volatility in fixed income. Specifically, for me, that means long-dated government bonds.”
As someone who applied sterling/dollar exchange rate hedges to his portfolios in the lead-up to the EU referendum, despite many investors dismissing it as a waste of money, Bowie thinks history could repeat itself with the next wave of European elections.
“The French election could be a massive game changer. It is clear electorates are voting for change, therefore, anyone who underestimates the impact of the French election could see significant volatility.”
