Now I am not wishing to tempt fate this close to the 25thanniversary of the 1987 stockmarket crash, but in spite of having to endure what seems to have been a tsunami of negative macro news, 2012 has so far been somewhat of a bumper year for risk assets, particularly equities and corporate bonds.
Nearly all the stockmarket gains have been enjoyed over the last few months. Ironically, this was during a period when analysts were busy downgrading corporate earnings growth and, more recently, a downgrade for 2013 global economic growth by the IMF. Whoever said that there was a direct correlation between economic activity and returns from equities? Not us, that’s for sure.
So rather than being earnings driven, the recent rally has been purely down to a re-rating of equity markets driven primarily by Mario Draghi’s comments in July that he would do whatever it takes to preserve the Eurozone’s integrity and, more importantly, backing up his comments with decisive action just a few weeks later.
Not to be outdone, Ben Bernanke went on to announce QE3 in September, otherwise referred to as QE infinity, which included the purchase of virtually every piece of mortgage debt available.
Whether money printing on this scale works in the long term is anyone’s guess. Personally, I have my doubts, although one thing has become abundantly clear and that is that the world’s major central banks are determined to do all they can (and we now know that they can and will do an awful lot) to keep interest rates at their current historic low levels.
Not surprisingly the asset class that appears to have benefitted the most from this policy is corporate credit, as investors’ search for all things yielding has created an enormous demand for both investment grade and high yield bonds.
This in turn has pushed prices higher, to the point where yields in both the investment grade and high yield space have never been lower.
The bulls will of course point to the low levels of defaults and the fact that the spreads relative to government bonds remain attractive.
Our answer to that is that we prefer to buy when defaults are high (and therefore priced in).
Meanwhile, spreads compared with gilts, et al, admittedly look relatively attractive, although investing in the latter at current record low yields can only cause financial pain over the longer term in our opinion.
In spite of our longer term caution for fixed interest securities, it seems likely that the strong technical drivers for corporate bonds are likely to remain in place for some time and with cash looking set to produce a negative real return for the foreseeable future, it is quite possible that corporate bond yields will be forced lower still.
Longer term, however, the big risk for bonds remains the normalisation of interest rates and the lower yields are pushed, in the meantime, the greater the pain when this eventually occurs.
For this reason the Premier multi-asset funds remain underweight many of the more popular and traditional areas of the fixed interest markets, while increasing our exposure to floating rate issues. Meanwhile, we are maintaining a reasonable exposure to what remain unloved equity markets and continue to find some excellent opportunities in the uncorrelated alternative assets space.
David Hambidge is director of pooled funds at Premier Asset Management