The weight of onerous global debt levels, rising interest rates and the end-of-cycle environment mean the fixed income world is starting to be more attractive to investors.
David Stonehouse, vice president and portfolio manager (focus fixed income) at AGF, believes investors should start to be more prudent but that it’s not yet time to “turn turtle”.
In the first part of his interview with WP looking at the global debt levels and what it means for the investment industry, Stonehouse addressed how an advisor should be assessing the current landscape.
He said that recession indicators are at most flashing yellow not red right now and that fundamentals don’t suggest things are coming to a head.
However, he added that the level of economic tightening means there is less room to manoeuvre with interest rates and less opportunities than in recent times.
He said: “You’re starting to get more attractive levels to invest in the fixed income world than you’ve had in some time, so you’re back to the situation we witnessed briefly a few years ago where bond yields are now higher than the stock market dividend yield.
“It means that bonds are starting to become more competitive as an alternative to stocks – they’ve sold off pretty substantially in the last two years since the summer of 2016 for a number of reasons and they now represent a more viable alternative.”
Stonehouse said investors can now buy a government bond at the better part of 3%, even going out only five years in the United States, adding that in Canada it’s not much different to a 30-year bond and is “essentially risk free”.
“That starts to look more intriguing when dividend yields are maybe 1.75%, or less than 2% anyway.”
Everyone knows we are getting late in the cycle, said Stonehouse, so for investors this is an exercise in determining whether there’s a lot of runway left or whether things are getting more challenging.
He said: “Being mindful of the fact we are getting later in the cycle and that recessions are inevitable means that you might want to be getting a little more prudent but you don’t want to turn turtle yet and part of that might be to shift a little bit towards bonds. That’s one conclusion that one can draw.
“We are also mindful that even though interest rates are low, lower than they have been in previous cycles, the central banks, led by the Fed in the States, have already undertaken a fair amount of tightening, especially because they have not only raised rates but they’ve stopped quantitative easing and in the case of the US, reversed it to some extent.”
At this stage of the expansion, Stonehouse said advisors should be watching for cracks in the system.
He said: “Are we seeing strains in the high-yield bond market? Are we seeing strains in the automotive loan [market] and with more delinquencies? Are we seeing strains in the emerging economies because of the spill-over effects of the interest-rate environment in the States, some of which we have seen this year?
“Those are the sorts of things we are keeping our eye on or engaging with, whether they are systemic to cause either a recession or a major capital market correction.”
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