Traders on the trading floor of the New York Stock Exchange.
Source: NYSE
According to Quilter Investors Portfolio Manager Sascha Chorley, investors’ concerns about a rise in inflation are misplaced and bond markets are the most attractive since 2015.
Inflation concerns have led to a surge in bond yields in recent weeks – particularly on the US 10-year Treasury as a benchmark – and an accompanying decline in bond prices (as prices move inversely relative to yields).
Rising inflation is usually bad news for bond investors, as it affects both the value of the interest they receive on their investment and the amount they will get back at maturity.
But in a release on Friday, Chorley expressed skepticism that a steep rise in inflation is on the way.
“When 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. “Crucially, however, it has been a steady increase rather than a sharp increase since 2020.”
He said that given current bond yields and the shape of the yield curves, “this seems like the best time to add to government bonds since 2015. It could be very wise to add some fixed income positions to add some ballast to portfolios. add. “
While acknowledging that inflation has the potential to rise, Chorley argued that structural problems caused by the pandemic, such as a rise in unemployment if support measures are phased out, could limit purchasing power.
In addition, much emphasis is placed on the mass of savings accumulated during lockdowns. But there is no guarantee that this money stack will be spent, especially given the accumulation has largely taken place in wealthier households, ”he said.
“Central banks will also ensure that inflation does not get out of hand and have plenty of room in their policy arsenal to neutralize any spikes.”
His comments came after the U.S. Federal Reserve quietly speculated that inflation could lead to a tightening of monetary policy, indicating it has no intention of raising interest rates until 2023, and the Bank of England hit a similar Thursday. moderate tone.
Chorley’s opinion is not widespread, however, and many investors are preparing for a sustained rise in bond yields.
In a note on Friday, Capital Economics has raised its forecast for its 10-year yield in the US to 2.25% by the end of this year and 2.5% by 2022, from 1.5% and 1.75% earlier.
The 10-year interest rate fell slightly around 1.6822% 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 loose fiscal stance that will give a significant boost to the US economy in the coming years.
President Joe Biden recently signed a $ 1.9 trillion stimulus package and Democrats are already planning a second spending plan targeting long-term infrastructure later this year.
Investing in value versus 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 – that investors believe have strong future earnings potential. Recent stock market jitters have led to major growth stocks, such as the US technology giants being hit hard.
“Value has been in the doldrums for a while, but business is looking for rising growth expectations and this rising yield environment, and as such, now may be the time to add more substantial weight to portfolios,” Chorley said.
Despite much talk of a “rotation” from growth 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 need not be mutually exclusive.
“There is tension among investors because on the one hand you have this value component that is about to recover as we see the cyclical upturn unfold in the coming year, but at the same time, investors are also looking at thematic exposure as they continue to look for long lasting opportunities. are, ”said Tahir.
Tahir suggested that with more options available than ever before to seek targeted exposure to themes such as artificial intelligence, digitization and the clean energy transition, investors can seek 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 could see that growth and value can actually co-exist.”