“Credit markets are pricing in very little risk premia now, at a time when default rates are rising,” he says.
Whether within the equity or bond asset classes, Miller’s view is that the companies that will thrive in the next stage of the economic cycle will be those with the best business models and lowest levels of debt, rather than geographical location or the investment style with which a sector of the market is associated.
Long-term focus
Pictet Asset Management fixed income fund manager Jon Mawby says the key to fixed income investing with yields at the present level is that investors can focus on the longer term and simply own the assets until maturity.
He says a consequence of the sharp sell-off in bond prices, particularly in the corporate bond universe where he is focused, is that assets are trading at deeply below their par value.
For example, he says he has been able to buy investment-grade bonds trading at 48p in the pound, which he feels offer sufficient yield that “it’s almost impossible to lose money, and that if one is content to own the assets until maturity, unless the company defaults, one will be paid at 100p in the pound”.
Vanguard chief economist and head of the investment strategy group Jumana Saleheen says: “Our bond return expectations have increased substantially. We now expect UK bonds to return a nominal annualised 4.4 to 5.4 per cent over the next decade, compared with the 0.8 to 1.8 per cent annualised returns we expected before the rate-hiking cycle began.
“If reinvested, the income component of bond returns at this level of rates will eventually more than offset the capital losses experienced over the past two years. By the end of the decade, bond portfolio values are expected to be higher than if rates had not increased in the first place.”
‘Equilibrium level’
While Miller feels that rates and bond yields may be at or near their peak, he does not foresee a return to the very low rates of inflation and interest rates that dominated the decade prior to the pandemic.
He says demographic changes that impact the size of working-age populations — while governments have moved away from “austerity” policies and are now running larger budget deficits — and moves towards the use of more renewable energy sources will each add to inflation in future.
