In perfect Advise Only style, I went to analyze the interest rate curve, using as evaluation method:
- the "Reversal” to synthesize the value (approach Value);
- la price change for the momentum (approach Momentum).
The idea behind the Reversal is that the interest rates of a bond tend to rejoin a long-term value (the "mean reversion" phenomenon). Therefore, when rates are below the historical average, it is expected that they will tend to rise again (price drop) , while when they are above average they will tend to go down (price increase). Combining the two approaches, this is what emerges from the analysis.
According to our approach, the government bonds with the greatest potential (those on the left) are those of the Emerging Countries, led by the BRICS, the Greece and finally the Portugal.
However the analysis cannot be stopped at this point, because each country is in a different situation in terms of economic growth and monetary policy. Some additional considerations of a qualitative nature are therefore necessary.
USA and UK
Among the developed countries are those with the better prospects for growth and inflation. Under these conditions, they are the closest countries to one normalization of monetary policy and, therefore, to an increase in interest rates which penalizes the entire bond sector.
Eurozone
Inflation is not a problem and, based on the latest assumptions being discussed in the markets, the ECB should be ready to intervene with further unconventional measures. It is true that interest rates in Peripheral Countries have never been so low. However, if interest rates are converging, then they still have room to go down. But the problem is: you can fill your portfolio with Greek or Portuguese bonds, where is the default risk is still relatively high, despite declining yields? In our opinion, no.
Emerging Countries
Overall the Emerging Countries are in better conditions than in developed countries but, for better or for worse, they are countries highly sensitive to global financial conditions. Although the appetite for this asset class seems to have returned in the last month, the argument made for the Peripheral Countries of the Eurozone is valid: interesting yields, but one must not exaggerate with purchases.
Japan
The actions implemented by the premier Abe and from Central Bank go in the opposite direction:increase inflation and encourage the migration from bonds to equities. If you don't expect an imminent catastrophe, I don't think there is much point in fighting the BOJ (the Central Bank of Japan).
Summing up, in a context of gradual economic recovery and financial stability i Peripheral Countries and Emerging they have attractive real returns, but it is not advisable to increase the risk profile of the portfolio too much. A good degree of diversification is a must.
How to invest in bonds?
It's not an easy time to invest in bonds. On the one hand there are Countries that are returning to normal (USA, UK) and on the other countries (Eurozone) with ever lower interest rates it's a mix of growth and employment not compatible with the order of public finances. To this scenario, we at Advise Only have decided to respond in two different ways depending on the type of portfolio.
Buy&Hold wallets
They are portfolios with a long-term time horizon, rebalanced 1-2 times a year, like Board,Objective Children, Income target, Goal Home. Right now, we don't see great buying opportunities and Italy's risk/reward profile is one of our most satisfying. For this reason, the heart of the bond component of these portfolios remains linked to Italian bonds, having a good amount of diversification between core countries, supranationals and inflation linked. We avoid unnecessary movements.
Tactical wallets
For this kind of wallet, Advise Only offers its users the app free of charge Express wallets. For these nine portfolios we opted for a larger one diversification and for a reduction of risk:
- with a good dose of cash;
- reducing the duration eurozone bonds;
- decreasing the weight of ETFs linked to BTPs;
- adding a Emerging Market ETF e inflation-linked USA
