Our strategic view continues to be underweight the bond markets and currencies of the old industrial, lower-yielding economies with structural problems in favor of economies that boast higher yields as well as healthier fundamentals, promoting more sustainable growth, lower deficits (in some cases surpluses), and central banks with the freedom to maneuver. A background of political stability also remains an important requirement that bond investors should consider, a long-term thematic trend that we have followed since 2009.
The unprecedented level of monetary accommodation and quantitative easing (QE) from the world’s central banks and the desire to preserve growth at any cost continues to suggest an inflationary, not deflationary, outcome. We therefore view the current benign outlook, evident in inflation forecasts, with a skeptical eye.
Globally, longer yields are stretched, even in the healthier economies, and we would not advise considering bonds with longer durations. The global drive to a greener economy and more sustainable energy sources will likely lead to further upward pressure on energy and transport costs, increasing inflationary pressures. While QE appears to be keeping yields low with no immediate inflationary pressure, we fear that governments will become addicted to this fix, stoking inflationary pressures for the future, and thus making an allocation to inflation-protected bonds attractive.
For us, the bond markets of the U.S., eurozone, United Kingdom, and Japan continue to look less attractive than smaller, healthier economies.
It remains the currencies of those ‘old’ developed markets that need to decline and that are likely to decline over the long-term. The case for a structurally weaker U.S. dollar remains well known, and the same case can be made for the British sterling. The euro and the yen are only marginally better, and the difference continues to narrow. We believe longer term, the currencies of the smaller, more dynamic economies—with trade surpluses, healthier growth, higher yields and interest rates—should continue to appreciate. We particularly like the currencies of the more dynamic Asian and Latin American economies.