Traders on the floor of the New York Stock Exchange.
Source: NYSE
Investors’ concerns about rising inflation are out of place, and bond markets are the most attractive in 2015, according to Quilter Investors portfolio manager Sascha Chorley.
Inflation concerns have led to a sharp rise in bond yields in recent weeks – especially in the 10-year US Treasury benchmark – and an accompanying fall in bond prices (as prices move in the opposite direction to yields).
Rising inflation is usually bad news for bond investors, as it reaches both the amount of interest they receive on their investment and how much it earns back at maturity.
But in a statement issued on Friday, Chorley expressed skepticism that a sharp rise in inflation is on the way.
“If we look at market-based expectations for inflation, it is true that the indications are above the 2% target set by many central banks,” he said. “But essentially, it’s been steady growth since 2020, rather than a sudden rise.”
He said that given current bond yields and the shape of yield curves, “this seems to be the best time to add in 2015 government bonds. Starting to add some exposure to fixed income could be prudent enough to add some ballast to portfolios. “
While acknowledging that inflation has the potential to rise, Chorley argued that structural problems caused by the pandemic, such as rising unemployment as support measures are canceled, could restrict spending power.
“Moreover, much emphasis is placed on the mass of savings that was accumulated during the blockades. But there is no guarantee that this pile of cash will be spent, especially given that the accumulation took place largely in households more rich, “he said.
“Central banks will also make sure inflation does not get out of hand and have enough room in their policy arsenal to crush any growth.”
His comments come after the US Federal Reserve eased speculation that inflation could trigger a tightening of monetary policy, signaling that it does not intend to raise rates until 2023, and the Bank of England reached a similar tone on Thursday.
However, Chorley’s opinion is not widespread and many investors are preparing for a prolonged rise in bond yields.
In a note on Friday, Capital Economics updated its forecast for the US 10-year yield to 2.25% by the end of this year and 2.5% by 2022, from 1.5% and 1.75 % previous.
The 10-year yield fell slightly, to around 1.6822% on Monday morning.
Capital Economics noted the Fed’s apparent willingness to accept higher long-term yields and the Biden administration’s ability to sustain an extremely weak fiscal position, which will give a major boost to the US economy in the coming years.
President Joe Biden recently signed a $ 1.9 trillion incentive package, and Democrats are already planning a second spending plan focused on long-term infrastructure later this year.
Investment value vs. growth
When it comes to equity investments, Chorley advised investors to look for valuable stocks – which are considered cheap compared to the company’s financial performance – rather than growth stocks – which are considered by investors to have strong earning potential. future. The recent turmoil in the stock market has seen strong growth, such as the US tech giants, which have hit hard.
“The stock has been in jeopardy for some time, but things are looking for it with high growth expectations and this environment of yield growth, and as such, it may be time to start adding more weight to portfolios,” he said. Chorley.
However, despite much discussion of a “rotation” from growth to stock in recent months, Mobeen Tahir, associate director of research at WisdomTree, told CNBC on Friday that the two ends of the stock market should 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 evolution unfold next year, but at the same time investors are looking at the thematic exposure, because continue to look for opportunities that have a long shelf life, “Tahir said.
Tahir suggested that with more options available than ever to seek targeted exposure to topics such as artificial intelligence, digitalisation and the transition to clean energy, investors can look for growth beyond the “pure market capitalization approach”.
“We think there’s an opportunity to have a little bit of both, because in 2021 we could see that growth and value can actually coexist.”