This week Morningstar.co.uk is bringing you simple solutions from the experts about where you should put your money and why.
Emma Wall: Hello and welcome to Morningstar. I am Emma Wall and I am joined today by Nick Gartside, Manager of the JP Morgan Global Bond Opportunities Fund.
Hi, Nick. So we are here today to talk about the global outlook for bonds and we should probably start with what's been going on this week. We've seen a massive spike in bond yields in the U.S. Is this the beginning of the end?
Nicholas Gartside: No. In a word, it is not. So think of the moves in bond yield very much as a correction, not a reversal. And what's driven that correction is positioning. So, I mean, just think about it. There was a pack stop bid for bonds through ECB, it looked like a one way trade so positions are very, very concentrated. So, there is a little bit unwinding of that.
The second thing and the big thing is, of course, that there is now some inflation back in the market. You can look at inflation expectations and they've gone up. So inflation won't be super high, but were not in a realm of deflation and that's the big difference.
Wall: And you talk about, we're not in the realm of deflation, is that for the U.S., is that for the U.K. or is that for developed market in general?
Gartside: It is. So, the critical one to look at is the eurozone, I mean, that was the really big worry that the eurozone would slip into this downward deflationary spiral, ECB QE seems to have broken that. And for other markets, the key indicator to watch is wage inflation, and ultimately I think what a big economy is.
It's you and I going out shopping, you and I as consumers and we will spend more when we get wage increases. Wage grows around 2% in the U.S. and the U.K. now and that's good. That is the indicator that should be on every bond investor's checklist.
Wall: So, obviously, U.S. QE coming to an end; eurozone only just really beginning its QE; Japan, I think, would probably go for a third lot of QE. How does all this money coming into the global market create opportunities for you or dampen opportunities for you?
Gartside: Well, you hit the nail on the head, Emma. And when you look at Japan and when you look to the eurozone, what the central banks are doing there is buying more bonds than are being created. So ultimately, that's another reason, it's a correction not a reversal. What it also means though is a lot of those government bonds look pretty pedestrian in terms of their risk reward profile. What we think investors should be doing is looking at corporate bonds; investment grade corporate bond, high-yield corporate bond and then on a much more selective basis emerging market debt.
Wall: And within those fears that you've just talked about, where are the real opportunities for you; is it sector driven, is it issuer driven. Is it very much picking one by one?
Gartside: It's certainly picking one by one, but that pull out few themes there; one theme is financials. And you can think what's happening now. You've got economies deleveraging still, banks raising lots of equity. So that's good for the debtholder. The other theme is probably Europe. Again, think in Europe you've got all these government bonds with the negative yield. You've got economies that are now growing. So, there the risk is default rates are lower, not higher. So things like European high-yield again should be finding its way into investors' portfolios.
Wall: Nick, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.
