Old Mutual Global Investors’ (OMGI) strategic bond fund manager Stewart Cowley has warned investors to avoid government bonds after yields in the securities rose on the back of an optimistic UK growth forecast.
Mr Cowley, who runs the group’s £929m Global Strategic Bond fund, told delegates at the Morningstar Investment Conference that investors should avoid government bonds and brace themselves for the effects of central banks unwinding their monetary policies.
Last week the Bank of England said the UK economy was now on a better footing after the growth forecast was revised up to 1.2 per cent in 2013. Governor Mervyn King said he expected the economy to return to its pre-crisis size in the second quarter of 2014.
The 10-year gilt yield had risen to 1.93 per cent last week – up from 1.8 per cent the previous week. As yields move inversely to prices, gilt sellers will have to accept decreasing prices if yields continue to rise.
“Government bonds were the way to hide your money from the banking system but that time has gone,” said Mr Cowley.
“Very long-dated government bonds are supposed to be safe but there is going to be equity-type losses fairly soon,” he added.
The manager said asset allocation models were “pushing us into the riskiest areas of the market” and suggested that safe places were either cash or funds that can make money in a range of circumstances.
While Mr Cowley said that “overall the market is seeking inflation protection”, he cautioned investors not to feel safe in inflation-linked bonds.
“They will go down just like any other bonds, they will just not go down by as much,” he said.
The manager was sceptical of the recent monetary easing policies of central banks and was shorting Japanese government bonds, as he believed the nation had shown “no evidence” that it was able to achieve its stated goal of consistently targeting 2 per cent inflation and weakening the yen.
He was similarly unimpressed with the £375bn quantitative easing programme in the UK, questioning how the Bank could exit its asset purchase programme without upsetting the balance of the gilt market.
“How can you signal you are no longer the final buyer in the market without some disruption?” he said.
Also speaking at the conference was Chris Rice, head of Pan-European equities at Cazenove Capital and manager of the £933.6m European fund. He said investors would be rewarded for not taking refuge in areas of the market they perceived to be “safe”.
He believed investors have been scarred by the global financial crisis in 2008 and have been prepared to put money into defensive companies, regardless of the price they had to pay, because they feared a similar meltdown was around the corner.
“Since 2008, investors have been building portfolios to protect themselves and I feel that when you look at different asset classes, what’s overvalued is the price of safety,” he said.
Mr Rice said it was hard to find value in quality European businesses, adding that companies such as Heineken and Nestlé were trading at some of their highest price-to-earnings ratios in 40 years.
“The odds of making money out of [a company like] Nestlé is very low,” he said.
He added that cyclical companies would find favour again after a rally largely driven by high-quality stocks.
“The appetite for safety is enormous but they are not the assets that will protect you. The move in [other safe-haven assets] like gold and the Swiss franc is a sign that a very popular trade is coming to an end.”
The manager said he is now looking to add value from more cyclical areas of the market, adding that for the first time in a while there were pockets of the European market that looked “exceedingly cheap”.
