As the global recovery continues apace, an orderly deflating of the bond price boom, fuelled by central banks‘ unconventional policy measures, is more likely than a sudden rupture, according to ETF Securities, one of the world’s leading, independent providers of Exchange Traded Products (ETPs).
Years of central bank asset purchases have sparked historically-high equity prices, unprecedentedly low bond yields, and unparalleled, minimal volatility, sparking investor alarm about an abrupt puncture in the asset bubble, which could create huge falls in prices and surges in volatility.
But James Butterfill, Head of Research and Investment Strategy at ETF Securities believes the unwinding will be more orderly.
He says: “Global bond yields are hovering near the lowest levels in history but we would characterise this a bond balloon, not a bond bubble. The critical difference is what happens at the end: central bankers are keen to deflate the balloon, rather than burst the bubble.
“Artificially low yields driven by extraordinary levels of central bank stimulus means investors are rightly questioning the underpinnings of the equity rally in the face of what we feel is a misnamed bond ‘bubble.’ The current ‘risk-on’ environment where equity markets are reaching record highs is supported by a improving economic outlook and solid valuations, however, investors are more nervous than the low volatility environment suggests.
Even in the face of stronger wages and consequent inflation, central bankers are aware of the damage volatility spikes and market instability would have on jobs and investment. In this context we envisage opportunities in a number of asset classes, including currencies, European equities and industrial metals.”
ETF Securities second Triannual Outlook for 2017 sets out the case for growth opportunities for:
- European equities and tech stocks: “European corporate revenues appear flat of late, but stripping out foreign revenues reveals continued growth. We continue to see Europe as having the best earnings recovery outlook while being, on a relative basis, attractively valued. The tech sector, despite having relatively attractive valuations, has suffered from recent poor price performance. We believe the tech sector sell-off is overdone, as delivered results have convincingly beaten analysts’ expectations. Both earnings and revenue growth have been positive, highlighting that the fundamentals remain intact.
- The US Dollar: “We expect the US Dollar to gain ground in H2 2017 against major currencies broadly, but lower volatility should see the Japanese Yen move sharply lower as the central bank remains accommodative and investors look offshore for yield.
- Sterling: “Uncertainty surrounding Brexit negotiations will overshadow the increasing willingness of the Bank of England to tighten policy against a relatively stable domestic economy. To the extent that deliberations give rise to some clarity surrounding a constructive economic outcome for both the UK and the EU, we feel GBP has upside potential, especially against the Euro. Rising real yields and lower volatility should support the Pound.
- Gold and industrial metals: “We anticipate the Fed to remain cautious with its policy settings, particularly when inflation looks to have cooled-off in the shorter-term and believe the fair value for gold is US$1260 for year end. We continue to see growing demand for commodities at a time when there is a continued lack of investment, particularly in the mining industry. We therefore see industrial metals as the most attractive commodities subsector.”
- Emerging Market debt, especially Asia, Latam and Turkey: “Emerging market bonds remain compelling in our view for investment diversification and capturing higher yields.”
ETF Securities also sees weakness in the Euro, “where investors are underestimating the desire of the ECB to engender inflation pressure while supporting the underlying economy. The strength of the euro is not a comfortable position for the ECB, as it threatens the firmer footing that inflation had been building - core CPI is at its highest level since 2013. Dovish rhetoric from the ECB could be the catalyst for the near record long futures positioning to unwind quickly.”
ETF Securities second Triannual Outlook for 2017 also sets out:
- Unwinding Fed’s balance sheet to have limited impact on US yields
- China Congress: The making of a strongman
- Quantum computing brings cyber security apocalypse
- Can digital/crypto currencies influence monetary policy?
- How to invest in low carbon economy