- Covid-19 has created a new world for investors, and the old investing playbook will be challenged;
- Negative stock-bond correlations no longer apply, and the world of negative-yielding debt is expanding;
- Investors will now have to go beyond indices and pick countries;
- The switch to fiscal policy and the real prospect of inflation will put both developed and emerging countries under pressure;
- Investors would do well to look for countries that are net creditors and whose debt offers a positive yield;
Here in Asia, we entered a Covid-19 new world back in February - social distancing, closure of public spaces, and work-from-home arrangements - but the world of investing entered a new world quite a while ago.
Time to throw out the old playbook
Specifically around stock-bond correlations. The belief in negative correlation between stocks and bonds - stocks go up in boom times and bond prices go down and vice-versa - has shaped the industry for years, but that disappeared in 2019 when developed bond yields went to zero, and recent COVID-19-induced changes to global markets require us to rethink our approach to investing.
Why? Because repeated rounds of quantitative easing mean global central banks have very little firepower left to combat downturns – interest rates are at historical lows and the pile of negative yielding debt has grown to a record USD 15trn, or 24% of the global fixed income market at the end of March 20201.
Negative yielding debt in global bond markets, Aug 11-Mar 2020
Now, investors and asset managers are in a quandary. With yields in developed markets either at zero or below, the old playbook of allocating to global indices is going to have to end up in the trash. Investors will now have to go beyond indices and pick the countries.
A new world for bond investors
But that is not going to be easy. With monetary policy having less firepower, fiscal policy will have to take up the slack and that may unleash a new world in which inflation picks up in countries across the globe.
In this potential new world where fiscal austerity is off the table and inflationary pressure is around the corner, debtor nations will be under even greater pressure from the bond markets.
That's the kind of scenario you'd associate with emerging markets, but given debt loads in the developed world, it's not beyond the realms of imagination that it can happen in developed markets too.
Start by looking for net creditor nations
One way to navigate this new world is by looking for net creditor nations.
Japan, Germany and China are the top three net creditor nations by some distance - but only China offers a positive nominal yield right now.
Top Three Creditor Nations and Nominal Yields on 10 Year Sovereign Bonds, April 16, 2020
And more than yields, China fixed income is one of the few bond markets to deliver a positive total return to investors this year.
So as we enter this new world of bond investing, investors are going to have to adapt, but given the trends we have pointed out above, it needn't be too hard. We'll report back on the latest developments in both China and global markets in a month's time.
Global bond indices, Total Return YTD, Mar 31, 2020
A globally oriented service for a globally integrated world
Views and opinions expressed are presented for informational purposes only and are a reflection of UBS Asset Management’s best judgment at the time a report or other content was compiled. UBS specifically prohibits the redistribution or reproduction of this material in whole or in part without the prior written permission of UBS and UBS accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions contained in the content of this webpage have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith but no responsibility is accepted for any errors or omissions. All such information and opinions are subject to change without notice but any obligation to update or alter forward-looking statement as a result of new information, future events, or otherwise is disclaimed. Source for all data/charts, if not stated otherwise: UBS Asset Management.
Any market or investment views expressed are not intended to be investment research. Materials have not been prepared to address requirements designed to promote the independence of investment research and are not subject to any prohibition on dealing ahead of the dissemination of investment research. The information contained in this webpage does not constitute a distribution, nor should it be considered a recommendation to purchase or sell any particular security or fund. The materials and content provided will not constitute investment advice and should not be relied upon as the basis for investment decisions. As individual situations may differ, clients should seek independent professional tax, legal, accounting or other specialist advisors as to the legal and tax implication of investing. Plan fiduciaries should determine whether an investment program is prudent in light of a plan's own circumstances and overall portfolio. A number of the comments in the content of this webpage are considered forward-looking statements. Actual future results, however, may vary materially. Past performance is no guarantee of future results. Potential for profit is accompanied by possibility of loss.
© UBS 2020 The key symbol and UBS are among the registered and unregistered trademarks of UBS.