3 min read 21 Jun 22
“Positive real returns are not available without taking fairly speculative positions on the short-term direction on market,” says David Lloyd, Deputy Chief Investment Officer for public fixed income. “If you’re not feeling heroic, it is safe to say there’s no safe haven on offer.”
In times of uncertainty, investors have historically parked their money in cash to wait out the volatility until more attractive opportunities arise.
But with high inflation, investors are losing around 7% to 8% in real terms on an annualised basis by holding money in cash, so how should they be navigating the current landscape?
“The most important quality right now is clear-headedness,” says Lloyd. “A really important variable, inflation, has changed significantly for the first time in decades. That's not a trivial development. This is a pretty opportune time for investors to revisit, and revalidate their approach to investment.”
M&G believes it is crucial for investors to take into account both timeframe and risk tolerance. For fixed income, risk – when boiled down – entails the possibility of permanent loss, for example when a borrower defaults on their obligations.
“We shouldn’t confuse risk with volatility, which can sometimes mean very aggressive ups and downs of market pricing,” explains Lloyd. “If we can look through the noise of volatility, while being aware of the possibility of permanent loss, then the job of navigating the market becomes less fraught.”
According to Lloyd, adopting a long-term timeframe is the easiest and most effective way of proceeding in current market conditions.
Over the long-term, where can investors look to at least mitigate the punitive cost of holding cash?
“Areas of the bond market offer yields which are significantly in excess of cash rates at the moment,” Lloyd notes. “Of course, at the same time, bonds provide a significantly greater degree of certainty of outcome than equities may.”
Through the fixed income lens, the key question for investors is whether they will get their money back.
“This has a wonderful simplicity to it,” says Lloyd. “When you consider the current turmoil around inflation, economic outlook, uncertainty around policy, geopolitics, and all the rest of it, to be able to boil down the prospect of an investment to one simple is very helpful. And it's certainly the case that the outlook for other assets can never be boiled down to such a simple question.”
Alongside the presence of a maturity date, investors have a potentially clearer idea of what income they are going to get back on their investment.
However, although investors know when the capital is due to be repaid, they need to have a considered view regarding the risks that the borrower may not be able to meet these obligations.
“The key to assessing these risks is research and analysis. There are no shortcuts,” says Lloyd.
In the current reality, achieving positive real returns is no mean feat.
“The known returns currently offered by bonds and the fact that at the moment, they offer yields that are significantly in excessive cash rates, that mitigates some of the punitive costs of holding cash,” highlights Lloyd.
“Fixed income remains in our view probably a better home for now, certainly than cash, and possibly other assets too. This wasn't supposed to happen bearing in mind the trust that hitherto had been placed in central banks, but for now at least it’s the reality.”
The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.