Stock markets will deliver bond-like returns with equity levels of volatility as economic growth plateaus, corporate profit margins peak and earning multiples look stretched.
Yet, it is developed market sovereign markets that are set to suffer the most.
Pictet AM predicts a 2.7% yield on German 10-year bunds in five years’ time, while Japanese government bonds are set to take an even bigger hit.
“In the next five years we expect a negative return on a global 50/50 portfolio in real terms – effectively, if you were in bond ETFs and equity ETFs,” says Luca Paolini, chief strategist at Pictet AM. “Over the very long term, this portfolio has returned 5%. This is the challenge investors have.”
Quantitative easing (QE) has been responsible for much of the half equities, half bonds portfolio’s recent performance, which is why Pictet AM is so pessimistic, Paolini says.
“We still expect real rates to be negative almost everywhere. If you take an average of policy rates globally for the next five years real rates will be negative, but the level of monetary easing will be reduced. At the end of this, in five years’ time, most of this monetary stimulus will come to an end,” he says.
The assessment was based on a mixture of JP Morgan developed and emerging market bond indices, plus the MSCI All Countries World Index (ACWI).
A basket of world government bonds will fall 1.9% annualised over the next five years, Pictet AM predicted.
A pinch of salt
But Lyxor Asset Management head of ETF strategy for Northern Europe Adam Laird says he takes returns forecasts with a “healthy pinch of salt”.
Investors should be cautious about basing their decisions on a single report like this, Laird says.
The portfolio is useful for making simple comparisons, but wouldn’t make sense for many investors to put into practice, he says.
“A 50/50 portfolio of global equities and global bonds would have a very high dollar weighting, this currency risk wouldn’t be quite right for most UK or European investors.”
Just 32% of bond managers beat their benchmark in Q1, according to Lyxor analysis.
Passive bond picks
Chase de Vere research manager Justine Fearns says there is room for passive and active bonds exposure in portfolios, even as the argument for active management strengthens with more volatility and concerns about a falling market.
While Fearns lists L&G Short Dated Sterling Corporate Bond Index as an appropriate passive pick for investors seeking to manage duration, she adds the team’s All Stocks Gilt Index is also suitable for investors.
“Gilts have continued to surprise, are supported by regulation and if the economic picture deteriorates are usually deemed an asset of safety whatever the price,” she says.