‘I am not a perma bear or a perma bull,’ says Fredrik Nerbrand, global head of asset allocation at HSBC. He is, nevertheless, now piling into sovereign bonds.
Nerbrand (pictured), a former Wealth Manager cover star, is doing so at a time when others are fleeing the asset class.
In May, the most recent month for which IMA statistics are available, UK Gilt funds suffered net redemptions of £117 million and £153 million was pulled from Global Bond funds.
Such flows have prompted excitable chatter of a great rotation out of fixed income and into stock markets, an idea Nerbrand rejects. ‘The great rotation is away from equities and into bonds,’ he said. In the near term, he is confident that is precisely what investors should be doing.
For Nerbrand, there are five principal starting criteria for strong equity returns: low valuations, high interest rates, low corporate profitability, improving demographics, and the potential for deregulation. None are in place at the moment.
Nerbrand has also found his range of leading economic indicators – which he prefers to the more commonly cited data points such as purchasing manager indices that he terms ‘coincidental’ – have turned negative in recent months.
‘ISM and PMI numbers are for amateurs. You do not make any money from trading them. Rather, you need to have a lead over them.’
Proprietary indicators tell Nerbrand the global economy is softening, meaning elevated equity valuations are poised to ‘fall with a vengeance’.
He is therefore allocating to top-tier bonds, with three issuers in particular appealing to him. First, he likes Treasuries as the safety they offer is going to be ‘the first port of call, the muscle memory’ for investors in a market downturn.
Second, he is buying bunds on the basis that any quantitative easing in Europe will benefit German debt above any other, since he believes it will be based on economic weighting rather than the size of a country’s bond market.
Third, Nerbrand has gone long on Australian government debt, in this case attracted by the combination of the country’s large bond market and high exposure to the global economic cycle, meaning any slump would propel local investors from equities into fixed income.
He has not yet taken out a net short position in equities, but ‘would not be surprised’ to see a 10-15% correction in the months ahead.
However, his rationale is not premised on such a crash. ‘I do not necessarily think you need a massive shock to drive Treasury yields lower.’ Rather, he suggests simple stagnation could suffice.
‘Cash may be king, but fixed income rules,’ Nerbrand added.