The big global headline this past week was the annual US Fed meeting in Jackson Hole where the future of US monetary policy was outlined. That said, they didn’t really say anything the markets didn’t already know namely low rates to remain for the foreseeable future and an allowance of higher inflation – which further strengthened the view that Central Bankers around the world will do what whatever it takes.
So, what this means is that easy money remains the status quo for the foreseeable future. However, as we all know, the reality is that nothing usually is free in is this world and that all the injected liquidity that has been mostly invested in risk assets will at some point need to be repaid. The big question remains; when they can’t kick the can down the road any more what happens next? We still feel that given this scenario holding a larger percentage of funds in defensive assets like fixed income will become a much more popular choice with investors seeking stability and certainty of income! There are still bonds available yielding 4%-5% which compared to other alternatives is a great return.
One only must look at the chart below to see the recent out performance of defensive vs risk assets which highlights the importance of fixed income exposure to any investment portfolio. Recent history has shown there is no better time to appreciate and utilise the benefits of bonds in your portfolio. There are different types of bonds available and each type and class play a role in a diversified portfolio depending on your investment goals, risk aversion and time horizon. Government bonds are regarded as risk free however, with yields under 1%, investors are forced to look at higher yielding corporate bonds which still offer returns between 2% – 6%
We think it is critical to note the difference in the volatility of each asset class below. We know which one we would prefer if you want to look after your blood pressure and sleep well at night!