Investing.com — The verdict appears to be in: 2023 will be the year bonds give stocks the kick they’ve been asking for for the past 12 years.
The broad consensus on Wall Street and Europe supports fixed-income securities outperforming next year, after what some call a “historic reset” in inflation, growth and global interest rates, which prepared the developed world for recession and a year of fiscal restraint.
Wealth managers’ sighs of relief — particularly in Europe, where zero interest rates have made bonds a poor bet over the past decade — are particularly intense, as they should be: an investment in bonds often requires more discretion on the part of a manager than a simple investment. In index funds that made it so easy for stock investors to make money until this year’s disaster. More active management means higher fees, allowing the sector to return to a simpler, more honest business model after five years of systematic greenwashing disguised as ESG funds.
But enough irony. Is the consensus fair? There are certainly good reasons to believe that.
Having offered barely more than pennies over the past decade, the bonds are now yielding meaningful returns: the risk-free benchmarks in the US, UK and eurozone yield 4.47%, respectively. , 3.20% and 2.01% at the time of writing. Yields on sub-sovereign, mortgage and high-quality corporate debt are much higher, and while still below current inflation rates, the prospect of low inflation over the next two years means that holding bonds is no longer a certainty from the slow destruction of wealth. It was in the days of quantitative easing.
Recession has already begun in Europe and is expected to hit the United States in the middle of next year, while recent developments have shown how difficult it is for China to get out of the zero-growth trap, which makes another year of substandard growth possible in the world’s second-largest economy.
Analysts Morgan Stanley (NYSE:) believes that stocks could fall further as the upcoming recession drags down earnings. Lisa Shalit, chief investment officer at Morgan Stanley Wealth Management, argued in a blog post this week that earnings for S&P500 companies will be just $195 a share next year, down from the $230 currently projected.
It said the companies’ “extraordinary ability to increase sales and profitability in recent years is not sustainable and could soon reverse” in a higher rate environment.
The public’s focus on the current state of the economy rather than expectations means that stocks generally react less immediately and less predictably than bonds when central banks move from tightening to policy easing.
But usually the first sign of policy easing is enough to convince lenders to keep credit lines open to large corporations, hence the recommendation of Daniel Morris, head of market strategy at The National Bank of Paris Paribas (EPA :), this good business credit is the best place to be for the next few months.
“Low valuations (ie higher spreads) do not accurately reflect what we believe to be favorable fundamentals,” he said in a note to clients this week. By contrast, he added, “we are not yet ready to invest more widely in riskier assets such as equities… We still fear an even greater decline in growth and earnings,” not to mention the permanent risk that geopolitics can easily take. Wrong turn next year.
2022 was definitely a miserable year. A typical 60/40 portfolio of stocks and bonds generated a negative 20% yield through October, compared to an average of 9% to 10% over the past 50 years, according to BNP’s Morris. Even in 2008, this portfolio only lost 14%.
But most pros still caution against betting on a recovery too quickly.
“Owning any of the assets will be more rewarding next year than this year,” Tom Stephenson, chief investment officer at Fidelity Personal Investing, said in a blog post this week. “But a steady rotation from an overweight in government bonds at the beginning of the year to a stock preference at the end of the year can make a good year even better.”
By Geoffrey Smith