Time to switch to bonds

[Adamski]

Goldman Sachs predict bonds outperform this year...

https://www.goldmansachs.com/insights/p ... bonds.html

They're forecasting bond yields in 2023 to exceed stock dividends, which hasn't happened since 2008.

Bonds taken a hammering in 2022, and been unattractive vs equities in recent past, but is it time to get into bonds? They're forecasting better bond yields, and potentially entering a recession, further downside to (US) equities?

Expectation seems to be inflation can only be reversed with a recession, so stocks have got further to fall, as companies start reporting lower profits.

Do you agree? And if so how are you investing in or switching an allocation to bonds?

I hold bonds via vanguard Lifestrategy 60, but be interested what bond funds/efts are popular.

[dealtn]

Goldman Sachs predict bonds outperform this year...

https://www.goldmansachs.com/insights/p ... bonds.html

Not obvious where they make such a prediction in that article. Care to elucidate?

[MrFoolish]

I tend to think all the available information is baked into the prices of all asset classes - so how can anyone really know?

But if I had to guess I'd say the UK will continue to limp along, avoiding disaster, and UK bond prices might recover towards the mean. But equity prices could do even better (valuations are not stretched), so it's a coin toss.

[Adamski]

Not obvious where they make such a prediction in that article. Care to elucidate?

Hi there, it's not specifically stated but I think it's strongly implied.

Making the case for quality bonds

"As uncertainty about growth lingers, higher quality fixed-income assets — such as investment-grade company debt, asset-backed securities and mortgage-backed securities — may be attractive investments next year, Mueller-Glissmann says."

"after a sharp increase in bond yields this year, new and potentially less risky alternatives are emerging in fixed income: U.S. investment grade corporate bonds yield almost 6%, have little refinancing risk and are relatively insulated from an economic downturn. Investors can also lock in attractive real (inflation-adjusted) yields with 10-year and 30-year Treasury inflation protected securities (TIPS) close to 1.5%."

And implying that equities have been overvalued since the financial crisis.

"For stocks to be the better investment, investors will need to be compensated for the extra risk – this can be either through higher yields, which is currently not the case, or particularly strong growth. Indeed the long-term growth of S&P 500 earnings necessary to achieve an equity risk premium in-line with its long-run average of 4.5% has increased to near 7%. Given the headwinds to global economic expansion, and recent inflationary trends like deglobalization, decarbonization and labor shortages (which can weigh on profit margins), it will be difficult to achieve the growth that’s embedded in stock valuations."

From others articles

"As households shift some investment to (now higher yielding) bonds, they are expected to reallocate $100 billion out of equity funds."
https://www.goldmansachs.com/insights/p ... -2023.html

"And in the meantime, government and corporate bond yields have risen enough that they are becoming a competitive alternative to equities."
https://www.goldmansachs.com/insights/p ... -2023.html

[MaraMan]

This is quite interesting on the subject of bonds v equities looking ahead.

Its called Radical change in markets: Howard Marks Sea Change.

https://www.youtube.com/watch?v=RREu7lEb0nM

MM

[richfool]

Multi-Asset Managers seem to also favour bonds:

Bonds are back: Multi-asset managers tip fixed income for 2023

30 December 2022

Analysts and fund managers say the “brutal” correction in bonds this year has left the asset class looking more attractive than equities from a risk/reward perspective.

By Anthony Luzio,
Editor, Trustnet Magazine

Multi-asset managers are overwhelmingly backing bonds in 2023, with some saying this is the most excited they have been on the asset class in more than a decade.

After a 40-year bull run, government bonds reached a point in 2021 where they could no longer offer either of the key characteristics they are typically expected to deliver: income and diversification.

As analysts at JP Morgan Asset Management noted: “At one point, a staggering 90% of the global government bond universe was offering a yield of less than 1%, forcing investors to take on ever greater risk in extended credit sectors that had much higher correlations to equities.

“Low starting yields had also diminished the ability of government bonds to deliver positive returns that could offset losses during equity bear markets.”

This all changed in 2022, as central banks began to hike interest rates in a bid to control inflation, causing a “brutal” correction in fixed income. Investors in UK government bonds also had to deal with the fallout from Kwasi Kwarteng’s disastrous mini-Budget: while these assets are supposed to be the safest available, the FTSE Actuaries UK Conventional Gilts All Stocks index was down more than 30% at one point this year.

However, multi-asset managers claim the market has now priced in expected increases in inflation and interest rates, meaning the only way is up for bonds.

https://www.trustnet.com/news/13349903/ ... e-for-2023

[dealtn]

Multi-Asset Managers seem to also favour bonds:

...
However, multi-asset managers claim the market has now priced in expected increases in inflation and interest rates, meaning the only way is up for bonds.

https://www.trustnet.com/news/13349903/ ... e-for-2023

If the market has correctly priced in expected increases in inflation and interest rates, then any change in prices should be due to any unexpected changes in those variables from here.

So, for the statement

meaning the only way is up for bonds

to be true, it means that it isn't possible for any unexpected change to be a rise in either interest rates or inflation expectations. That really isn't (ever) true.

Honestly, statements like this are not just stupid, but are dangerous for those that unquestioningly believe it.

I have no knowledge on whether bonds (or equities) are going up or down from here, nor which will outperform the other. But at least I will admit it and not spout nonsense by way of trying to advise others.

[vand]

There is a good case to be made for starting to reallocate something towards bonds imo if you are of of the classic stock/bond persuasion and you think that disinflation will be the main theme in 2023 such that we finish the year with positive real yields.

Personally I remain cautious and think it is a mistake to believe that we will simply and painlessly just trend back to the magical 2% inflation target - history has shown that inflation is a beast that is hard to kill, and inflationary bouts tend to play out in multiple waves, and while we may be on the downside of the first wave, it would be naive to think the war is won after taming the initial wave.

and even if inflation does fall back to trend eventually, I think the era of negative real interest rates is over, and people will still demand a real return on their capital because they have just been reminded what can happen to their bonds if inflation does take grip again. Historically long term bonds should expect to earn 2-3% real return; for that to happen going forward bond yields need to pretty much stay where they are even as inflation falls.

[richfool]

There is a good case to be made for starting to reallocate something towards bonds imo if you are of of the classic stock/bond persuasion and you think that disinflation will be the main theme in 2023 such that we finish the year with positive real yields.

Personally I remain cautious and think it is a mistake to believe that we will simply and painlessly just trend back to the magical 2% inflation target - history has shown that inflation is a beast that is hard to kill, and inflationary bouts tend to play out in multiple waves, and while we may be on the downside of the first wave, it would be naive to think the war is won after taming the initial wave.

and even if inflation does fall back to trend eventually, I think the era of negative real interest rates is over, and people will still demand a real return on their capital because they have just been reminded what can happen to their bonds if inflation does take grip again. Historically long term bonds should expect to earn 2-3% real return; for that to happen going forward bond yields need to pretty much stay where they are even as inflation falls.

Indeed. I can't see any likelihood of interest rates dropping back to nominal levels again, which seems to suggest better prospects for bonds and poor prospects for equities, particularly growth stocks, for a while yet.

I added bonds to my IT portfolio back on October, (NCYF and SMIF), and added to my holding of MYI. I have even been pondering buying back into MATE which I offloaded early last year, and perhaps adding HDIV.

[Wuffle]

I have been accumulating cash in a SIPP this tax year over and above my auto enrolment payments elsewhere.
It only contains a legacy lump of VUKE (Ftse100 tracker) from pre pandemic.
Sacking off the VUKE and buying a full lump of Vanguard 60/40 is looking appealing in this environment when it wouldn't have a year ago.
I will have partially side stepped the adjustment of bonds and the American Market (where I have been underweight) and the UK bias of the lifestyle product is offset.

I do like a streamlined plan that does a few jobs in one go.

W.

[Adamski]

.. its called Radical change in markets: Howard Marks Sea Change.

https://www.youtube.com/watch?v=RREu7lEb0nM

Thanks, interesting info. I often watch his (PensionCraft) videos on YouTube. He knows his stuff.

[Adamski]

.. buying a full lump of Vanguard 60/40 is looking appealing in this environment when it wouldn't have a year ago.

I'm thinking upping my holding in VLS 60. Think 60:40 portfolio may make a come back this year, after bring much derided during the bull market 2019-2021.

[PrefInvestor]

Well I for one have been loading up the truck on Preference Shares (Prefs) & BOI for a while now. Prices got to a very depressed state with available yields in the high 7.x% range at one point. Personally feel like its just a matter of time till the share prices recover and then there’s the income too !. Not quite Bonds but definitely not equities.

My portfolio is ~26% in Prefs right now. I have a further 12% in various fixed interest style investment trusts (bond funds, infrastructure & property debt). Also have a large allocation to renewable energy trusts.

So a 60/40 portfolio of sorts I guess, just not many bonds and not really 60% equities either TBH.

Of course if interest rates spike out of the park it could all go wrong I guess, so DYOR etc.

ATB

Pref