The equity markets have performed as expected since the beginning of October, following negative perceptions of the global economy, according to Picet Wealth Management’s chief strategist Christopher Donay.
Until recently, fears of deflation linked to lower oil process have meant that sovereign bonds slowed the equity market rebound, but the announcement of strong job creation data has changed this, explained Mr Donay.
Hawkish comments from Federal Reserve head Janet Yellen have also considerably increased the likelihood of a fed rate rise in December.
“We continue to expect long-term interest rates in the US to rise gradually to around 2.7 per cent by the end of 2016, since Fed tightening will be unusually drawn out,” stated Mr Donay.
“Ten-year Treasuries are on track for a poor year in terms of returns in 2015 (only around 2 per cent) but will likely remain attractive to protect portfolios against shocks to equity markets, given their negative correlation with equities.”
He added that monetary policy divergence also points to a further strengthening of the dollar against the euro.
Mark Dampier, research director at Hargreaves Lansdown, agreed that this is all true for the time being, but he described current conditions as a financial experiment.
“I suspect that while rates may rise in the short term in the US, this might reverse if the global economy slows.
“The Fed only has until June, as the US election will be in full force by then, so between June and November expect no change,” he said, adding that it still remains a possibility that we will see a fourth round of quantitative easing in the US in next summer, should things weaken.
“This would make the current uptick in bond yields look like a bargain.”
Matt Harris, director at Dalbeath Financial Planning, stated that equity markets may indeed go sideways for a while, unless something interesting happens to cause them to do otherwise.
“Bond yields longer-term will probably rise, but then that isn’t saying a great deal given where we are in the current interest rate cycle.
“The forecast of a (very slightly) stronger dollar is a bit more definitive, but to be honest forecasting currencies sits quite close to astrology and homeopathy in my experience.
“One thing I agree with him [Mr Donay] on is that government bonds have a place in most client portfolios as an effective diversification and risk control measure, but that is true of all times.”
lucinda.borrell@ft.com
