Traders on the floor of the New York Stock Exchange.
Source: NYSE
Investor concerns about rising inflation are out of place and bond markets are the most attractive since 2015, according to Quilter Investors portfolio manager Sascha Chorley.
Concerns about inflation have led to a sharp rise in bond yields in recent weeks, especially in the US 10-year benchmark 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 value of the interest they receive on their investment and the amount they recover when it expires.
But in a statement Friday, Chorley expressed skepticism that there is a strong propensity for inflation.
“If we look at market-based inflation expectations, it is true that the indications are above the target set by the 2% of many central banks,” he said. “But basically, 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 exposure to fixed income can be very careful to add some ballast to your wallets. “
While acknowledging that inflation may rise, Chorley argued that structural problems caused by the pandemic, such as rising unemployment as support measures are canceled, could restrict the power of expense.
“In addition, much emphasis is placed on the mass of savings accumulated during closures. But there is no guarantee that this pile of cash will be spent, especially since the accumulation has occurred largely in wealthier households. “, he said.
“Central banks will also ensure that inflation does not get out of control and has plenty of room in its policy arsenal to crush any rise.”
His comments come after the US Federal Reserve calmed speculation that inflation could trigger a tightening of monetary policy, indicating that it has no intention of raising rates until 2023 and that the Bank of England adopted a tone similar to that of Thursday.
However, Chorley’s view is not widespread and many investors are preparing for a prolonged rise in bond yields.
In a note on Friday, Capital Economics improved its forecast for 10-year U.S. yields to 2.25% later this year and 2.5% in 2022, from 1.5% and 1.75% previously.
The ten-year yield fell slightly around 1.6822% on Monday morning.
Capital Economics cited the Fed’s apparent willingness to accept higher long-term yields and the Biden administration’s ability to maintain an extremely weak fiscal stance that will provide a major boost to the U.S. economy in the coming years. .
President Joe Biden recently signed a $ 1.9 trillion stimulus package and Democrats are already planning a long-term infrastructure-focused spending plan later this year.
Investment value vs growth
When it comes to investing in equities, Chorley advised investors to look for value stocks – which are considered cheap compared to the company’s financial performance – rather than growth stocks – which investors consider to have a strong potential for future benefits. Recent nerves in the equity market have seen strong-growth equities, such as the U.S. tech giants, hit hard.
“Value has long been in a state of disrepair, but things are looking for it with rising growth expectations and this growing yield environment, and as such now may be the time to start adding more weight. in the wallets, ”Chorley said.
However, despite talk of a “rotation” of growth in equity stocks in recent months, Mobeen Tahir, associate director of research at WisdomTree, told CNBC on Friday that both ends of the stock market equities should not be mutually exclusive.
“There is this tension between investors because, on the one hand, you have this value component that is about to recover as we see the cyclical upturn develop next year, but at the same time investors as well. they are looking at the themed exhibition as they continue to look for opportunities that have a long shelf life, ”Tahir said.
Tahir suggested that with more options available than ever to seek specific exposure to issues such as artificial intelligence, digitization and the transition to clean energy, investors can look for growth beyond the traditional “capitalization approach”. pure market “.
“We believe there is a chance to have a little bit of both, because in 2021 we could see that growth and value can coexist.”