Traders on the floor of the New York Stock Exchange.
Source: NYSE
Investor concerns about rising inflation are misguided and the bond markets have been at their most attractive since 2015, according to Quilter Investors’ portfolio manager, Sascha Chorley.
Inflation concerns have led to a sharp increase in bond yields in recent weeks – most notably in the 10-year reference US Treasury – and a fall in bond prices (as prices move inversely to yields).
Rising inflation is often bad news for bond investors, as it affects both the amount of interest they receive on their investment and how much they will receive at maturity.
But in a statement on Friday, Chorley expressed skepticism that a steep slope of inflation is on the way.
“If you look at market-based inflation expectations, it is true that the indications are above the 2% target set by many central banks,” he said. “But, crucially, it’s been a steady increase since 2020, rather than a sharp increase.”
He said that, given current bond yields and the shape of yield curves, “this seems like the best time to add to government bonds since 2015. Starting to add some fixed income exposure can be quite prudent to add some backing to wallets. “
While acknowledging that inflation has the potential to rise, Chorley argued that structural problems caused by the pandemic, such as an increase in unemployment as support measures are undone, can restrict purchasing power.
“In addition, much emphasis is being placed on the mass of savings that was accumulated during the blockades. But there is no guarantee that this pile of money will be spent, especially considering that the accumulation has largely occurred in wealthier families, ”he said.
“Central banks will also ensure that inflation does not get out of control and that they have plenty of room in their policy arsenal to crush any spikes.”
His comments were made after the US Federal Reserve acted to calm 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 set a similarly peaceful tone on Thursday. -market.
Chorley’s view is not widespread, however, and many investors are gearing up for a prolonged increase in bond yields.
In a note on Friday, Capital Economics raised its projection for the 10-year US yield to 2.25% at the end of this year, and 2.5% by 2022, from 1.5% and 1.75% previously .
The 10-year yield fell slightly to around 1.6822% on Monday morning.
Capital Economics cited the Fed’s apparent willingness to accept higher long-term yields and the Biden government’s ability to sustain an extremely loose fiscal stance that will provide a major boost to the US economy in the years to come.
President Joe Biden recently signed a $ 1.9 trillion stimulus package and Democrats are already drawing up a second spending plan focused on long-term infrastructure later this year.
Investment in value x 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 – rather than growth stocks – which are judged by investors to have strong potential for future earnings. . Recent tensions in the stock market have meant that high-growth stocks, like the US tech giants, have been hit hard.
“The value has been stagnating for some time, but things are improving with rising growth expectations and this growing income environment and as such, now may be the time to start adding more substantial weight to the portfolios,” he said. Chorley.
However, despite much talk of a “rotation” from growth stocks to value stocks in recent months, Mobeen Tahir, associate director of research at WisdomTree, told CNBC on Friday that the two ends of the stock market they don’t have to be mutually exclusive.
“There is this tension between investors because, on the one hand, you have this component of value that should recover as we see the cyclical recovery unfold next year, but at the same time investors are also looking at the thematic exposure , because they continue to look for opportunities that have a long lifespan, “said Tahir.
Tahir suggested that, with more options available than ever before to seek exposure targeted at topics such as artificial intelligence, digitization and the transition to clean energy, investors could look for growth beyond the traditional “pure market capitalization approach”.
“We think there is an opportunity to have a little bit of both, because in 2021, we will be able to see that growth and value can really coexist.”