
So, what will happen with the returns from global bonds? The consensus is that returns will be positive but low. “Some investors think that the asset class is doomed from inflation and government borrowing,” says Kettlewell, “but bonds can deliver a positive return.” He adds: “Inflation is going to be persistent, and some are predicting high inflation, but that’s going too far.” Lau is similarly bullish about the Asian market, saying that the total return for Asian-dollar investment grade bonds should be 2% to 3%. However, he caveats that with the condition that this will be reached only if US Treasury bonds are at 2% at the end of the year. “From a duration standpoint, it’s going to be a bit tougher,” says Purohit. “I think a year from now, in Germany bonds are going to be above zero. I think you are going to get some negative returns from a duration standpoint.” While most of 2020 was spent dealing with the Covid-19 crisis, the thinking now is of what the future will bring. Purohit, who is based in the US, says that Secor was originally underweight in inflation against liabilities. That, he says, was lucky. “Since then, one of the biggest changes in the UK has been in hedging real yields. As the funding status has improved, we have been starting to de-risk clients, reallocating them from riskier assets into more hedging-type assets,” he says. Looking to Asia, Lau says that PineBridge Investments has been overweight in high yield bonds versus investment grade and local currencies. “The economic background right now favours high beta,” he says. “We’ve been overweight in high yield since late last year and we’re now looking to neutralise it all, given the volatility in interest at the beginning of 2021.” What about the Mena region?
“We’ve been buying more longer-dated government bonds,” says Kettlewell. “That’s because we’re not worried about inflation. If we are right, long-duration government bonds will do quite well as prices will rise and yields will fall. If we’re wrong and we do see out-of-control inflation, we could face short-term losses.” That said, Kettlewell is keen to point out one thing. “We do have balanced portfolios,” he says. “We have 30-year government bonds against one-year high yield corporate bonds. We also own a local property developer here that has a bond that will mature in a couple of years. At the end of the day, we don’t put all our eggs into one basket.” Clouds of concern
While inflation is a risk in 2021, there are other clouds on the horizon. One thing that Mashreq Capital’s staff is concerned about, says Kettlewell, is the possibility of new variants of coronavirus. The real fear is that a variant emerges that is resistant to the current raft of vaccinations, leading to a new wave of outbreaks, further lockdowns and a renewed vaccine race. Other worries include an unexpected move from the US Federal Reserve. “We look to them a lot to see what they’re doing. If they do something unexpected like increasing interest rates due to inflation, that would be a big risk for us as fixed income investors,” he says. Purohit takes a similar tack, saying that the biggest risk is inflation, but the central banks will do a good job of managing inflation if it does arise. The problem would be if there were a series of inflation surprises. “A lot of people have received a lot of money over the last year. They haven’t been commuting or going out so much, so they’ve been saving that money. There’s now a lot of pent-up savings that are being thrown into the equity market.” Desperate times often call for desperate measures. Last year, Carnival issued three bonds over the course of the year, secured against the value of its ships – an innovation aimed at gaining investor confidence. Azhar Hussain, head of global credit at Royal London Asset Management, says that while the Carnival bond looked somewhat bizarre, its fundamentals were quite solid. “The cruise line industry is in a bit of a unique spot. Compared to where Carnival was a year ago, they’ve been huge beneficiaries.” It was not such a bad idea, according to Hussain. “For most of these companies, they’ve now got less competition going into next year – the risk is something happens that knocks that out. That’s always hard to predict, but they’ve not got more than enough capital and liquidity to have zero revenues for another year.” Carnival’s bond, however, seems to be something of a one-off. “We’ve not seen anything like that here in the Mena region,” says Kettlewell. “A reason for that is that we don’t have a large range of issuers in Mena. The ones that do issue tend to be governments or somehow related to governments.” The future contains many unknowns, opinion is widely split and consensus is rare – but everyone will be watching closely, for sure. © 2021 funds global asia