Is it time to rethink what constitutes a ‘safe haven’ in the current market environment? That’s the argument of JP Morgan Asset Management, who say bonds "simply cannot" offer the same portfolio protection and positive income investors have come to expect.
- JPMAM says bonds cannot offer the same defensive qualities they have done in previous eyars
- Tying up capital for a decade at below inflation is only ‘safe’ should the economic environment turn very nasty
- Central banks are reaching the limits of their monetary policy accommodation and are looking to government spending to provide the next wave of stimulus
It is certainly true that traditional safe havens look far from safe in this environment. 10-year gilt yields are back below 1% (at 0.75%), for example. Tying up capital for a decade at below inflation hardly feel ‘safe’. It relies on being able to sell them on to someone else who is even more worried about the environment than you are (the ‘greater fool’ theory), or that over 10 years, the stock market – including dividends – is going to lose more.
That said, the same could have been said five years ago and yet government bonds have proved a defensive and diversifying asset in spite of their low yields and in the face of moderate inflation. The average UK gilt fund is up 27.3% over five years, only a touch less than the average UK equity income fund (at 31.8%).
This may be true, but this performance has been supported by ever-looser monetary policy. It is clear that most central banks are reaching the limits of their monetary policy accommodation and are looking to government spending to provide the next stimulus. It is difficult to see what will deliver any growth in government bonds from here. Investors may get some diversification, but as John Bilton, head of global multi-asset strategy at JPMAM, said, they are being asked to take a zero or even negative return in exchange for that risk reduction.
What is the alternative? JPMAM argues that investors may need to turn to alternative options such as global real assets and infrastructure instead. Even cash may give more flexibility, albeit with an even lower income.
There is a broader question over whether investors need safe havens at all. While investors continue to worry about recession, there is little sign of it materialising. BlackRock recently said it wasn’t expecting recession in 2020 or 2021, given there were few signs of overheating in the economy and little or no likelihood of a tightening monetary policy. Either way, safe havens are seldom safe havens if investors overpay for them.
