Bonds are in for a tough ride in the first half of 2017 as US president-elect Donald Trump’s plans to boost fiscal spending could stoke inflation around the globe, a chief investment officer at UOB Asset Management said yesterday.
UOB has sold off longer-duration bonds and increased holdings of shorter-term ones in anticipation of faster US growth, John Doyle, chief investment officer for multi-asset and equity strategies, told the Reuters Global Investment Outlook Summit. Doyle expects three interest rate hikes by the Federal Reserve by the end of 2017.
UOB Asset Management in Singapore manages a total of S$15.2bn ($10.74bn) across its equities, fixed income and multi-asset units.
“The shift in inflation expectations... has big implications for investments,” Doyle said. “The early part of the year could be trickier (for bonds globally).”
The yield on benchmark 10-year Treasuries surged to a 2016 high of 2.3% on November 14. Japanese government bonds, German bunds and UK gilt yields all hit multi-month highs this week.
The surprise election of Trump has caused a surge in the dollar, bond yields and US stocks as markets bet on looser US regulations, increased stimulus and faster economic growth.
Trade-reliant emerging markets, however, have largely sold off on fears over Trump’s anti-globalisation stance, though there is uncertainty how much of his campaign rhetoric will become policy.
“There’s really no way to fully hedge the Trump risk,” Doyle said. “The trade risk is the biggest one we have to watch.”
The dollar could also continue to strengthen, particularly as a potential tax amnesty to urge US corporations to repatriate earnings could lead to further inflows, Doyle said.
“We do see an upward bias to the dollar,” he said.”In the first half, it’s pretty clear the dollar will be on the winning side.
In the second half, it depends on where growth and inflation move across the rest of the world.”
The stronger dollar could prove inflationary in other parts of the world as other currencies depreciate, Doyle said.
“That might mean there is not a need to be on monetary policy steroids in Europe and Japan to the extent we have been,” he added. “Interest rates will start to adjust in these economies.”
Despite a weaker yen, Japan is likely to be among the hardest hit in 2017, given its large domestic debt, low interest rates and unfavourable demographics, with no long-term solution, said Doyle, who is ‘underweight’ the world’s third-biggest economy.
“The yen is less of a factor now because Japanese exporters produce in the markets they export in,” he said.
UOB AM is also ‘underweight’ China in its Asian mandates, over concerns that include a potential housing bubble and the impact of the nation’s high debt levels on lenders – although Doyle maintains banks “will be able to earn their way through a (needed) period of delevering”.
The Chinese central bank has been trying to defend the renminbi, leading to some depletion of reserves, even as it tries to grow the monetary base, he said. “They have competing objectives. My sense is that they’ll try to err on the side of having ample liquidity domestically which means the RMB could fall further and they’ll continue to have to deplete reserves in the short term,” Doyle said.