Why picking bonds is as important as picking stocks

Around the proverbial four walls of Livewire, everyone loves to talk about how investors pick the best stocks. It’s not just about getting exposure to the Big Four banks, but picking which Big Bank you want to keep in your back pocket for income. The same is said about iron ore miners, consumer companies (buy what people need or buy what people want), and especially technology stocks.

Foreign it has been a shocker of a year i mean one of the worst ever in the bond markets certainly in my career we’ve got here because you know to start the year many of the central banks particularly in the develop market world in particular um you know were uh late and behind the curve to address more sticky inflationary pressures that were thought to be transitory

And the net result of that is not only of interest rates risen in policy rates risen but they’ve had to revise to higher levels of policy rates in a in a tighter path of tightening uh to to address these inflationary concerns yes and no you know i think the the yes part of it would be some of the structural issues that are a longer term in nature and really feeding

Through to this inflationary pulses have you know been fairly well understood by by our investment teams those being the the changing in demographics globally not only in the develop world but what’s happening in china and the implications for that wage pressure what’s happening with regards to supply chains and kind of peak global trade and the shrinkage of that

And in that creating bottlenecks and supply and then what’s happening in energy you know this desire to transition much of the global economy to to greener energy and all those things are longer term in nature and creating many of these inflationary pulses the exact timing of when that gets recognized by markets is harder to place the pulse on but we’ve certainly

Gone through that this year with markets recognizing uh the kind of more structural sticky nature of many of these aspects to inflation to be determined you know i think that the big question you have to ask yourself is the trajectory of inflation and do we start to see some plateauing to inflation and can we see some moderation in some aspects of how inflation’s

Derived and if we have you know our sites that yes that’s achievable more medium to long term um you know there is i think an understanding that the correlation structure of bonds versus equities can start to come back to more normalized levels that you expect when you’re running a 60 40 portfolio so in the short term you you know those correlation structures

Are going to be volatile but on the basis that we we can return to some degrees of um lower levels of inflation maybe higher than when we’re used to pre-covered but lower than where we’re at now and coupled with higher interest rates you know bonds could start playing not only a powerful role in portfolios but a good diversifier again more medium term uh really

Important and it’s exciting because we haven’t been here in a while we’ve been in this uh in a world of central banks really supporting uh fixed income markets through through policy extending their support into credit markets you know during the the covid era and now that central banks are keen to withdraw that support as a function of a necessity of fighting

Inflation and tightening policy tightening financial conditions markets are beginning to operate normally so yes security selection is going to play an important part it always has but i’d say more important part in the outcome of a bomb portfolio but there’s other things in fixed income more than just picking the bonds that you own you have to think about uh

What type of duration profile do you want to your portfolio do you want less price sensitivity to interest rates or more so short versus long duration you have to think about regions of the world that you’re investing you know right now we have a very very strong preference for the u.s market given it’s the best of a bad bunch on the macro front and there’s more

Certainty there from a macro perspective versus other parts of of the world so you know what region you’re in uh where you’re at on the yield curve what type of duration you have what bonds you’re choosing you know all very important factors to uh to fixed income results

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Why picking bonds is as important as picking stocks By Livewire Markets