All this week, we bring you a Guide to What the Experts to Say; the top insights from the Morningstar Investment Conference in London; emerging markets, stock picks and the impact of politics.
Emma Wall: Hello and welcome to Morningstar. I’m Emma Wall and I’m joined today by Jupiter’s Ariel Bezalel, to talk about the outlook for bonds.
Ariel Bezalel: Hi Emma.
Wall: So, you have called the juncture that we are at right now, the perfect storm for bonds, why is that?
Bezalel: I think for risk assets in general we are at a really interesting moment. Since the global financial crisis, it’s the first time where the major central banks of the world are quite literally together now tightening policy. Now risk assets have been on this fantastic bull run driven by primarily the fantastic amounts of liquidity that’s coming to market. Now you’ve got the Federal Reserve determined to raise rates.
You have the Bank of England stopping buying corporate bands. You have the European Central Bank now tapering back on their QE programme. The Bank of Japan are doing some sort of stealth tightening program as well. And the People’s Bank of China are also more recently, have also started to tighten policy as well. So, it’s quite an interesting juncture and I think we may have quite a volatile second half of the year as that punch ball is slowly being removed from the markets.
Wall: That means basically that rates are rising, but prices are falling. How do you find opportunities in an environment like that?
Bezalel: So, the picture I am painting here in terms of what investors should be doing, is start to think about increasing the quality of their portfolios, ultimately start to take some profits. And within bond markets what are we doing, we are increasing the quality of our credit portfolios by reducing our high yield exposure. And with our belief that we are set for a more volatile period and also the economic data is becoming a bit more mixed. So, whereas earlier this year it was all guns blazing across the major economies of the world.
You are beginning to see signs that things are slowing down in some of the major areas like the U.S. and China. So, with that in mind we think it’s time to actually start to, and this is somewhat non-consensus actually start to scale back into government bonds. We think that this inflationary or deflationary shock is now more likely than a reflationary shock.
Wall: Moving up the quality scale will be music to many investors ears who have been forced to take on more risk than perhaps they are comfortable with over the last decade, because low risk assets simply weren’t paying. Is this finally the beginning of the end are we going to see that reversion into the old norm?
Bezalel: I don’t know whether it’s the beginning of the end, but look what I would say is that this is the problem with QE. And in my opinion the reckless policies of central bankers. Unfortunately, because of 0% rates or negative rates in the likes of Europe. It’s led in my opinion to a massive misallocation of capital. People aren’t calculating the risk well.
So, people have been piling into assets like bonds especially into high yield on CoCo, into property, into equities just get that bit of yield without really thinking through the risks involved. And like I said I think with this incredible run assets have had combined with valuation. So, for example this is the third most expensive equity market in U.S. history, according to some metrics. It’s just time to scale back the risk.
Wall: Ariel, thank you very much.
Bezalel: Pleasure. Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
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