We believe now is the time to refocus on bonds, rebuilding the allocation to government bonds and high quality credit and looking for selective Emerging Markets bonds in the search for real income.
Time to refocus on bonds
Rethinking portfolios after the great repricing
Investment Convictions
- In the US, valuations have become more interesting.
- Although inflation could be close to a peak, we expect inflation numbers to remain volatile further complicating the Fed’s assessment.
- In credit, we have a preference for US Investment Grade, owing to a relatively more benign macroeconomic backdrop.
- On the back of the energy crisis, growth concerns remain throughout the Eurozone.
- In the case of a deteriorating growth / inflation profile, the ECB could go to the lower range of neutral rates.
- We remain neutral on European peripherals.
- In a fragmented EM space, some CBs are more advanced in their monetary policy normalisation.
- Opportunities for real returns can be found in selective EM bonds. We maintain a preference for high carry countries.
- We favour hard currency bonds: valuations are more attractive in HY vs IG given the macro cycle.
- In the US, valuations have become more interesting.
- Although inflation could be close to a peak, we expect inflation numbers to remain volatile further complicating the Fed’s assessment.
- In credit, we have a preference for US Investment Grade, owing to a relatively more benign macroeconomic backdrop.
- On the back of the energy crisis, growth concerns remain throughout the Eurozone.
- In the case of a deteriorating growth / inflation profile, the ECB could go to the lower range of neutral rates.
- We remain neutral on European peripherals.
- In a fragmented EM space, some CBs are more advanced in their monetary policy normalisation.
- Opportunities for real returns can be found in selective EM bonds. We maintain a preference for high carry countries.
- We favour hard currency bonds: valuations are more attractive in HY vs IG given the macro cycle.
A journey through the regime shift
With inflation becoming a dominant feature of the regime and Central Banks starting to act, we see three phases for bond markets: 1) the great repricing, 2) stabilisation and 3) normalisation.
We currently stand at the beginning of the second phase, stabilisation. In the tug of war between growth and inflation, Central Banks could soon be forced to cool down hiking cycles to prevent a major economic slowdown.
In this context, bond yields are stabilising and could again be seen as a source of diversification and protection against recession fears.
A turning point for Bonds
Investors have sharply disengaged from bonds in H1 2022 due to less supportive Central Banks raising rates to tame inflation. After the great repricing in the first half of the year, investors have turned their attention to the increased probability of a recession. In this environment, government bonds represent a space to look at, as yields are now more appealing.
We are at a turning point as investors are starting to be relatively more positive on bonds.
Four main themes for investors
Flexibility is the name of the game
To cope with this environment, investors should adjust their asset allocation stances.
Core Bond Allocation
- Focus on high-quality assets: core govies (US in particular) and IG credit for buy and hold purposes
- Include Chinese bonds in the core as a diversifier
- Look at sustainable bonds to benefit from green quantitative easing
- Adopt a flexible approach to get the most from aggregate bond markets
Yield Enhancement Satellite Focus
- Explore opportunities in selective Emerging Markets offering real returns
- Consider high yield, but selectivity is key
Vincent Mortier
The era of low or even negative interest rates is over. We strongly believe that this new market context provides a new paradigm for bonds, with more attractive valuations and a renewed outlook.
Group Chief Investment Officer
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Global Investment Views - September 2022
