A credit strategist has urged bond investors to profit from temporary rallies while remaining alert to a number of headwinds that could potentially cause a market correction in the long-term.
Ben Bennett, investment management credit strategist at Legal & General, said short-term factors can provide temporary relief from eventual deleveraging correction and feels investors should deconstruct these drivers of influences and adapt them to investment portfolios.
“Fund performance is measured on a continuous basis and the impact of short-term themes can dwarf that of a long-term framework for a quarter or even years,” he said. “The difficulty is then designing a portfolio that takes advantage of these short-term themes while remaining true to the long-term view.
“We believe that the global economy faces a number of long-term headwinds – notably the build-up of excessive debt that needs to be paid down. But while this suggests a cautious investment stance, there are a number of short-term factors that cannot be ignored.”
Among the short-term themes Mr Bennett envisions impacting the market this year include cyclical growth upswing, caused by loose monetary policies, corporate leveraging and speculation of a bond bubble.
In response to these short-term challenges, he favours sustainable investments that benefit from a leverage boost, such as emerging market infrastructure investment.
While Mr Bennett argues that this sector’s rapid success must have resulted in some capital misallocation, he believes there is still enough potential growth to hide this and is encouraged by a lack of emerging market consumer debt.
Moreover, in response to current low yield levels, Mr Bennett advises investors to look at riskier bonds that provide extra yield, while avoiding areas like housing markets which are sensitive to rising interest rates.
“Housing markets are particularly susceptible, especially if the underlying interest rate cannot be controlled domestically. The Spanish housing market leaps to mind, which argues against Spanish bank bonds,” he said.
