Canada Life Investments' chief investment officer has warned that record levels of negative yielding debt in European bond markets pose concerns to a "modestly weak" global economy but data suggests a correction is not on the cards.
In an interview with FTAdviser, David Marchant described the situation with European debt as an "odd dislocation" in an otherwise "reassuring" global outlook, and noted that even riskier bonds are struggling to offer positive yields.
"We’ve even got a situation where around a third of short-dated Euro junk bonds are in negative yield territory, which seems an incredible place to be," he said.
"The yield on 10-year Greek bonds are, give or take, the same as US 10-year Treasury [bonds], albeit in a different currency."
But in spite of these concerns, Mr Marchant did not feel we are approaching end of the current cycle, even though it has been running for an extended period.
“Although the cycle is clearly very long we’ve had a series of mini-cycles along the way, [such as] concerns about the slowing Chinese growth, [and] the government bond crisis in Europe.”
“Personally, I don’t feel like we’re standing on the edge, and if you look at the data it is still reasonably reassuring.”
In terms of the data, Mr Marchant explained that US growth is currently sitting at around 2 per cent GDP, with the forecast for 2020 also “reasonable”. He accepted, however, that growth in the UK and Europe is “a bit sluggish” but remained unconcerned about inflation levels and said interest rates are more likely to go down rather than up.
“That environment is still a reasonable one for both bonds and equities,” he said.
Some, however, have warned that a recession could be just around the corner; most notably the Bank of England, which has suggested there is a one in three chance of the UK falling into recession due to the uncertainty caused by Brexit.
But despite conceding this as a political concern - along with the rise of populism and gulf tensions - Mr Marchant told Money Management’s Craig Rickman that the supportive approach taken by central banks should alleviate fears of a market and economic downturn.
“Throughout my investment career at least, economies can perform despite the best efforts of politicians to derail them.”
“Sentiment has changed quite dramatically from a few months ago where we were expecting a rise in interest rates. The impact of that has been a big shot of adrenaline to equity markets and we’ve seen them, understandably, recover quite sharply. It’s a demonstration that the Fed and other central banks are there to support the global economy as we enter a period of some modest weakness,” he concluded.
craig.rickman@ft.com
