How does the monetary politics affect our portfolios?
Draghi’s words weigh heavily on the bond markets…
Draghi’s statements at the end of June indicating that reflationary forces (higher nominal growth and inflation) were replacing the deflationary fears of previous quarters, had a swift impact on the financial markets, producing sharp increases in long-term interest rates and a subsequent fall in bond prices across almost all the geographic regions.
Further fuel came from the Governor of the Bank of England, speaking about the withdrawal of monetary stimulus measures were the improvement in British economic activity to be confirmed.
… which supports our cautious view in fixed income assets in the short term…
We think that this negative bond movement worldwide could continue over the coming months if we pay heed to the statements issued by the major central banks about a possibly tougher monetary policy, together with the fact that the main international investors are positioned very positively in bonds.
Remember that investors’ positioning is usually a contrarian indicator. The more positive investors are in an asset, the less likely that asset is to perform favourably.
… which could have a negative effect on certain assets…
From our viewpoint, the most important effects are not the negative trends in bond prices over the coming months but rather the effect that interest rate increases could come to have on other assets or economies sensitive to these factors.
Over the next few months, many of these assets will be put to the test, which will enable us to surmise the strength of substance of many of them and appraise investment opportunities with a higher risk profile.
… and our medium- and long-term view concerning rates remains unchanged
Despite the rate hikes by the Federal Reserve and the statements from other central banks, we continue to think that both short- and long-term rates will remain at structurally low levels, hence we would capitalise on the falls in bond prices to buy for a 1- to 2-year investment horizon.