The most important stories on the markets, from the world’s leading asset managers.
Market Commentaries Highlights
The most important stories on the markets, from the world’s leading asset managers.
We bring you a round-up of our top-rated commentary from October.
A taste of the trends
Global growth slows down In our number-one ranked article this month, UBS summed up sentiment by saying that geopolitics has now become a driver of markets rather than just background noise. UBS is reviewing its previous belief that global economic growth will stabilise.
In a commentary titled ‘Defensively Positioned for a Decelerating World’, Mihir P. Worah from Pimco explained that ‘we’re seeing profit slow down and we’re seeing economic activity slow down.’ Mihir speculated that this could be due to trading uncertainty.
Opportunities in China China continues to fascinate this month. Schroders wrote about the growing importance of China’s A-shares, as mainland stock markets have been opened up recently via the Hong Kong stock exchange. MSCI’s decision to include A-shares in its major indices may have encouraged increased investment flow into China.
Bringing it down to the sector level, Aviva noted that China now has the second largest pharmaceuticals market behind the US, and is seeing a wave of innovation driven by government funding and incentives.
Maverick of the month
Japan’s reputation for disappointing investors for the past three decades is unjust, according to Ernst Glanzmann and Reiko Mito. They believe investors in Japan have many reasons ‘to be cheerful’.
Quick query results from last month
What did our readers think of plant-based alternatives that look, feel, and taste like real meat?
The future of food 58%
Just a fad
42%
The central subject: low yields stoop to new lows
Yields have tumbled since the financial crisis in 2008, prompting ongoing discussion about how to react. In October, seven of our top-20 articles covered this tricky issue in one form or another.
Negative yields Vanguard’s quite upbeat article ‘Why it’s not all negative on bonds’ ranked at lucky 13 this month. Shaan Raithatha certainly hasn’t given up on bonds, but he did start by outlining the ‘exceptionally low’ levels that bond yields have dropped to: ‘…they are guaranteed to generate a loss for investors who hold them to maturity.’
Benchmark 10-year bond yields
Vanguard calculations, based on data from Macrobond. Past performance is not a reliable indicator of future results.
Sunita Kara of Aviva quoted the dreadful figure that emerged in July from Bank of America Merrill Lynch – that around €3 billion of high-yield bonds issued by 14 companies had entered negative-yielding territory, joining US$13 trillion of global bonds already trading below zero.
How low can you go? The feeling going forward was also pretty negative, with commentators in agreement that yields are likely to carry on moving down.
Schroders analysis of the situation gave a range of reasons, nicely arranged into six charts. But before getting into the reasons why, James Molony noted that Austria’s 100-year bond (yes – 100 years!), which was launched in 2017 and pays just 2%, actually attracted quite a lot of investor attention. Surely a telling sign of poor confidence all round.
Investors have piled into the 100-year bond
Source: Thomson Reuters, CS2042
Political uncertainty, market volatility
Schroders blames the massive monetary support from central banks, low inflation and ongoing political uncertainty, especially regarding the US-China trade war. With slowing growth, and more uncertainty expected, the demand for safer assets will continue, driving yields lower.
Balancing risks and returns
Pimco said that the market volatility in August and September was the worst since the 2008 financial crisis. This encourages more investors to reduce risk in their portfolios, which in turn elevates regulated money-market assets. Jerome M. Schneider suggested that investors who can tolerate an increase in risk may ‘find an attractive alternative in high quality short-term bonds.’
Responding to a low-yield environment
UBS said that flexibility and diversification could be the best way for investors to protect their bond returns. Coming in at number two in the rankings, Jonathan Gregory suggested owning bonds in both the US and China, but with short positions in the expensive Eurozone to cope with whatever happens next.
Ranking at number 11 this month, Aviva suggested turning to high-yield bonds, the vast majority of which ‘remain in positive territory’. Combining US and European high-yield bonds could be a way to exploit valuation opportunities, diversify exposures and increase yields on a currency-hedged basis.
Ballie Gifford offered philosophy-based solutions to the problem with an intriguingly titled article ‘Island Time – Slow Bond Investing’. Torcail Stewart shared ethereal ideas like ‘cast your net wide’ and ‘eat what is in season’. The underlying messages seemed to be based around the ever-popular themes of diversity, flexibility and risk management, but it was a lovely read.
Go for gold?
With three articles in the top 20 this month, Schroders posed the question, ‘Is gold the place to hide from negative yields?’
Apparently it might be, as the price of gold just hit a six-year high: ‘The demand for safety is causing the amount of negative-yielding debt to rise together with the gold price.’ Gold with zero yield looks more attractive than bonds with negative yields.
Pimco said its multi-asset portfolios are overweight in gold, as real assets are quite attractive due to inflation expectations being fairly low worldwide.
Top ranked articles for October
1. Macro Quarterly – Is the noise becoming signal? The team at UBS thinks the US and global economies can avoid recession, but the risk has increased, and the ability to withstand future shocks is limited.
2. Fixed Income Views UBS outlined two possible scenarios for the global economy – a return to the ‘world of yesterday’ with open markets and relatively free trade, or ‘down the rabbit hole’ caused by a breakdown in international relations.
4. Japan: similar but not the same Another top-five article for GAM, which thinks the Japanese market is vibrant and attractive in valuation terms.
5. Beyond peak passive Too much of a good thing? The unrelenting appetite for passive investing could ultimately have a negative impact on market equilibrium, according to GAM.
