Traders on the floor of the New York Stock Exchange.
Quilter Investors ‘portfolio manager Sascha Chorley said investors’ concerns about a spike in inflation are misplaced and bond markets have been the most attractive since 2015.
Inflation worries have spiked bond yields over the past few weeks – particularly on the benchmark’s 10-year US treasure – and an accompanying fall in bond prices (as prices move in the opposite direction to yields).
Rising inflation is usually bad news for bonds as it undermines their value. In this environment, stocks are seen as a better choice for investors.
But in a release on Friday, Chorley expressed skepticism that a sharp spike in inflation is on the way.
“If you look at market-based inflation expectations, it is correct that the indications are above the 2% target set by many central banks,” he said. “What is crucial, however, is that there has been a steady increase rather than a sharp increase since 2020.”
Given the current bond yields and the shape of the yield curves, this is the best time to top up government bonds since 2015. It might be prudent to add some exposure to fixed income to add some ballast to the portfolios. “”
Although Chorley acknowledged that inflation has the potential to rise, he argued that structural problems caused by the pandemic, such as an increase in unemployment as the support measures unwind, could limit purchasing power.
“In addition, a lot of emphasis is placed on the bulk of savings accumulated during the lockdowns. However, there is no guarantee that this pile of money will be spent, especially given that the accumulation has largely taken place in wealthier households,” said he.
“Central banks will also ensure that inflation does not get out of hand and that there is plenty of leeway in their political arsenal to reduce any spikes.”
His comments come after the Federal Reserve calmed speculation that inflation could trigger a tightening of monetary policy, signaling that it does not intend to hike rates until 2023, and the Bank of England adopted a similarly reserved tone on Thursday posted.
Chorley’s view is not widely held, however, and many investors are preparing for a sustained surge in bond yields.
In a release on Friday, Capital Economics raised its forecast for 10-year US returns to 2.25% by the end of this year and to 2.5% by 2022 from 1.5% and 1.75% earlier.
The 10-year yield fell slightly on Monday morning to around 1.6822%.
Capital Economics pointed to the Fed’s apparent willingness to accept higher long-term returns and the Biden administration’s ability to maintain an extremely loose fiscal stance that will give the US economy a significant boost in the years to come.
President Joe Biden recently signed a $ 1.9 trillion stimulus package, and the Democrats are already planning a second spending plan that will focus on long-term infrastructure later this year.
Value vs Growth Investing
When investing in stocks, Chorley recommended that investors seek out value stocks that are considered cheap relative to the company’s financial performance, rather than growth stocks that investors consider highly profitable in the future. Recently, high-profile growth stocks like U.S. tech giants have hit hard.
“Value has been in the doldrums for a while, but things are looking good with increased growth expectations and this rising earnings environment, so now may be the time to rebalance the portfolios,” said Chorley.
Despite much discussion of a “rotation” from growth to value stocks in recent months, WisdomTree’s associate director of research, Mobeen Tahir told CNBC on Friday that the two ends of the stock market need not be mutually exclusive.
“There’s this tension among investors because, on the one hand, you have this value component that will rebound when we see the cyclical upswing in the coming year, but at the same time investors are also considering a thematic exposure because you keep looking for opportunities to that have a long shelf life, “said Tahir.
Tahir suggested that with more options than ever before to target issues such as artificial intelligence, digitization and the clean energy transition, investors can seek growth beyond the traditional “pure market cap” approach.
“We believe there is a chance to have a bit of both because in 2021 we could see that growth and value can actually coexist.”