10th December 2015
“Recent events serve as a timely reminder of the fragility of the global financial system. As we head into 2016, the slowdown in China and uncertainty over central bank policy will continue to play a significant role in investor thinking – not to mention the possibility of a ‘Brexit'. “It takes very little to trigger a turn in market sentiment at the moment, and I think we could see more regular bouts of volatility going forward. There will of course be periods where asset classes move together, but the diversification benefit of bonds should continue – as the investment grade corporate markets are still more likely to be driven by growth and inflation expectations over the longer term.”
Lower for longer
“While the global economic outlook remains subdued, it is clear the US Federal Reserve and Bank of England are uncomfortable running interest rates at record lows – they have been pegged at these levels for 7 years now and are causing capital allocation inefficiencies, distortions in asset markets and an ever widening wealth divide. The main issue is that global growth and inflation have continued trending down, but also the US and the UK have a high level of debt which makes both economies very sensitive to changes in interest rate expectations.
“I would expect any interest rate rises to be well telegraphed and ultimately gradual in nature. This is in keeping with the underlying structural debt issue, as well as my belief that the low growth and low inflation environment is here to stay for a while yet.”
Selectivity is key
“Investment grade bonds, in particular, are attractively valued and I do expect default rates to pick up. Corporate debt has risen as companies have taken advantage of low yields to borrow money to buy back shares or for mergers and acquisitions activity. This reinforces the need to remain selective in my view. Striking the right balance between yield and liquidity will also remain extremely important in the coming year. “Looking forward, given the low base level for yields, I do believe bond returns will be lower than we have been used to over the past 5 to 10 years. My base case for 2016 would be for mid-to-low single digit returns from investment grade corporate bonds. However, this is still positive in real terms and I do feel that bonds will continue to play a key role in smoothing out volatility in investors’ portfolios and working well as equity diversifiers.”
Find out more about bonds in the FundCalibre Guide
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Ian's views are his own and do not constitute financial advice.
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