THE BOND'S SEPULCHRE
Investment is usually a difficult theme to write about, as trends and fluctuations tend to be interpreted in various ways depending on the interest of the investor or even the government. Several recommendations can be given based on the same cypher, and depending on your style of investment and asset allocation in relation to the investor’s risks profile. This discussion tends to be wider when talking about particular assets, bonds or analysing the various ETFs offered in the market. What’s clear is that we can drag conclusions from fundamentals and based on macroeconomic analysis be able to determine which market will outperform this year. Investors need to have in mind that the bull market which has been accompanying s throughout the last decade has now finally ended, and both bonds and equity are already rising again and launching new expectations for investment firms, in an environment which seems to have been taken over by cryptocurrencies during the last year. We should be aware that government bonds are portraying a false image of their real capability of returns and be cautious at the time of analysing this kind of financial instruments.
Many investment gurus have declared he bond bull market to be ending, but this statement has been severely repeated since 2011, before having the lowest yields in the last ten years after the ECB and the FED decided to drop their rates to floor levels and inject liquidity in markets, mostly sovereign bonds through their everlasting purchasing programme; which has been recently reduced by the ECB from $60 to 30 bn dollars per month following recent trends on financial stability and adequate economic growth. These QE programmes have altered demand and supply in the bond market, as this intervention by the central banks tended to contract yields and increase prices through a hyper inflated demand and an expansion in emission of new bonds to finance their necessities by sovereign states. At the same time we can’t blame central banks for everything it has occurred in the bond market since 2008, as it is very difficult to determine how far the policies of central banks have affected bond prices and yields concretely.
Secular stagnation (low inflation and mild economic growth) has also taken a big role in the course bonds had taken. A great existent fear in markets is the end of QE policies and monetary impulses, as central banks start their tapering of bond purchases. Central banks have tried to be very cautious (too much in my opinion) to prevent creating instability in financial markets, which tends to be a completely idiosyncrasy, as back in 2013 the “taper tantrum” policy of the FED rocketed bond yields up to 3% at the same time the FED started debating about increasing interest rates and contracted volumes of bond purchases. Many investors have recently started selling their bonds due to uncertainty generated by several central banks, as even though the ECB awaited for its economy to finally strengthen to reduce their bond purchases by half, news that it might probably suddenly stop monetary incentives in September have caused a kind of instability in international parquets.
On the other side of the argument, the Bank of Japan still remains uncertain about what they will do in the future, as they have recently minimally cut their bond purchases, which is insignificant and ridiculous when having a public debt level of near 275%/GDP. China at the same time is not exactly into a QE programme, but investor’s confidence in American treasury bonds has fallen sharply as China has declared to be unwinding its purchases of this kid of bonds, as they are the second largest holder of American sovereign treasury bonds in the world, and several concerns have arisen in case the Chinese government decided to sell off an important part of their participation ,as probably markets won’t be capable of absorbing such levels of sudden oversupply, making yields rise disproportionately and irrespective to prices. One of the main reasons given by the Chinese government for selling American sovereign bonds and shifts their demand mainly towards inner corporate bonds. This is due to the extremely low yield of American treasury bonds and also the unpredictability of the dollar under President Trump’s mandate, in contrast to the enforcement of the yuan during the last year.
The several reasons presented above present a clear environment for investing in equity, as fast growing economies altogether with concerns about the bond markets have rocketed the main global indexes to maximums of the last 5 to 10 years. Fast growing economies tend to reduce public expenditure all way through with taxes, to promote development and innovation of private enterprises, which require lower or even inexistent government support. This kind of atmosphere is improving results of the main European and American companies; better known as “blue chips”, while at the same time it is generating value in smaller and many times nontraded firms. The end of intervention in financial markets by central banks is also promoting greater liberalization and supply-side policies by central governments, as for example the Trump administration corporate tax cut, which tend to be much more efficient when boosting economic growth and promoting stability than monetary policy.
Believing that bond yields will really increase this time is being very incredulous, as it requires the return of higher inflation, which the FED has already been trying to produce for nearly 10 years without a minimal sign of success. Investors already know this, as analyses of economic expectations have forecasted inflation to be kept below 2% for the next 5 years. Even if Trump, Macron, Merkel or May stimulate their internal economies and the whole of the US or the EU outperform the rest of continents or communities, it is practically impossible to see bond rates reaching yields of nearly 6-7% in a stable and mild growing economy. Stability and good corporate results make the perfect timing to invest in equity and try to beat the market. We shouldn’t be as conformist as Europe has always had. We should try to open our investment into new markets which we know well and have been observing for years, by leaving aside classical assets as bonds or gold and trying this time rational and alternative investing, in an environment that is definitely permitting it.
Widespread pessimism will always be present in markets, but we should always try to be contrarian to indicators and mass investment if we want to find real value. Bonds are a good investment tool in times of uncertainty and declining corporate benefits and projections, but truly not just after getting out of a crisis and with millions of dollars of new value being generate in American and European markets every day. Stocks are right now outperforming bonds incredibly, and this matter will be even greater when central banks finally put an end to their QE policies, and we should be aware and prepared for that. To create real value and find reliable investment opportunities, we should be beyond expectations and forecasts, and definitely not behind the curve.