Traders on the floor of the New York Stock Exchange.
Source: NYSE
According to Quilter Investors ‘portfolio manager, Sascha Chorley, investors’ concerns about a rise in inflation have been misplaced and the bond markets have been the most attractive since 2015.
Inflation problems have led to a sharp rise in bond yields in recent weeks – especially on the US Treasury benchmark for ten years – and a concomitant fall in bond prices (as prices move in reverse to yields).
Rising inflation is usually bad news for bond investors, as it affects the value of the interest they receive on their investment, as well as the amount they get back when it matures.
But in a release Friday, Chorley expressed skepticism that a strong inflation slope is on the way.
“If you look at the market-based expectations for inflation, it is true that the indications are higher than the 2% target that many central banks set,” he said. “But most importantly, since 2020, it has been a steady increase rather than a sharp rise.”
He said that given the current yields and the shape of yield curves, ‘this is the best time to add to government bonds since 2015. To start adding exposure to fixed income, it may be very wise to give the portfolios a ballast . “
While acknowledging that inflation may rise, Chorley argued that structural issues caused by the pandemic, such as an increase in unemployment due to the abolition of support measures, could limit spending power.
“Furthermore, much emphasis is placed on the mass of savings accumulated during barriers. But there is no guarantee that this cash pile will be spent, especially since the accumulation took place largely in affluent households,” he said.
“Central banks will also ensure that inflation does not get out of control and have enough room in their policy arsenal to smash any nails.”
His comments come after the US Federal Reserve calmed down speculation that inflation could lead to a tightening of monetary policy, indicating that it does not intend to raise rates until 2023, and the Bank of England on Thursday showed a similar pigeon tone.
However, Chorley’s view is not widespread, and many investors are preparing for a sustained rise in returns.
In a remark Friday, Capital Economics improved its forecast for the US yield for ten years to 2.25% by the end of this year and 2.5% by 2022, from 1.5% and 1.75% previously.
The yield for ten years decreased slightly on Monday morning to about 1.6822%.
Capital Economics cites the Fed’s apparent willingness to accept higher long-term returns and the Biden administration’s ability to maintain an extremely loose fiscal stance that will boost the US economy in the coming years.
President Joe Biden recently signed a $ 1.9 billion stimulus package, and Democrats are already planning a second spending plan focused on long-term infrastructure.
Investment between value and growth
When it comes to investing in stocks, Chorley recommended that investors look for value stocks – which are considered cheap compared to the company’s financial performance – instead of growth stocks – which are seen by investors as strong future earnings potential. Recent stocks in the stock market have been hit hard by strong-growing stocks, such as the US technology giants.
“Value has been in the doldrums for some time, but things are looking up with increased growth expectations and this rising yield environment, and as such, now may be the time to start adding more weight to portfolios,” Chorley said.
However, despite much talk of a “revolution” of growth in equity stocks in recent months, Mobeen Tahir, co-director of research at WisdomTree, told CNBC on Friday that the two sides of the stock market need not be mutually exclusive. .
“There is this tension among investors, because on the one hand you have this value component that is ready to recover as we see the cyclical upswing unfold in the coming year, but at the same time investors are also looking at thematic exposure as they continue to look for opportunities that has a long shelf life, “Tahir said.
Tahir suggested that investors, with more options available than ever before to pursue targeted exposures to topics such as artificial intelligence, digitalisation and the transition to clean energy, could seek growth beyond the traditional ‘pure market capitalization’ approach.
“We think there is an opportunity to have a bit of both, because in 2021 we can see that growth and value can actually exist.”