Veteran UK equity income fund manager Bill Mott has warned of a ‘bond bubble’ that could rival the dotcom bubble of 2000, if fears of deflation in the economy prove unfounded.
The manager of the PSigma income fund has compared the recent rush into bonds, as markets have feared the worst for the global economy, with the technology, media and telecoms (TMT) bubble that later collapsed wiping billions from the stock market.
He says: “Yields on government bonds worldwide are suggesting that we are now in a world where there is likely to be very little growth and very low inflation and possibly deflation. In such a world, bonds still represent good value but investors are likely to suffer significant losses on commodities (and related investments) and economically-sensitive equities in this scenario.”
But Mott says if fears of deflation in the economy prove unfounded, or governments respond to the fears with an inappropriate monetary response,
However, if fears of deflation prove unfounded or lead to an inappropriate policy response from central banks, then we could currently be in a ’bond bubble’ and the flows into bonds and bond funds since 2009 could be a repeat of the money that poured into Technology, Media and Telecoms stocks at the height of the ’dotcom bubble’ in 2000.
He says: “Under these circumstances, holders of ten-year US government bonds on 2.5 per cent nominal yields and UK government bonds on 3 per cent nominal yields could suffer significant capital losses.
The manager says his central case is for low growth in the UK, and higher growth elsewhere, not a deflationary environment.
The UK equity income guru says he accepts that a ’double-dip’ into recession and deflation is possible, but he believes politicians and central bankers may now be too fearful of deflation and implement exceptional policies to deliver inflation.
He says: “What excites us at the moment is that we believe that it is possible to construct a UK equity income fund which, in the long term, can deliver very acceptable returns and avoid much of the trauma that could be associated with an extreme deflationary or an extreme inflationary outcome.
“I cannot recall a time when the above defensive sectors have offered such attractive yields relative to ten year Government bonds.”