Bhundia: the volatility of bonds has been extraordinary
The past eight months have been an extremely tough market, investments expert Sailesh Bhundia told the weekly Hamilton Rotary meeting, with one of his chief concerns being inflation.
“We have also had central banks inadvertently just turn very hawkish in the first quarter,” said Mr Bhundia, senior director within the portfolio management team at EFG Asset Management in London, England.
He said central bankers are no longer raising rates in clips of 25 basis points.
“Today, Sweden’s Riksbank raised by 100 basis points,” he said. “The European Central Bank raised by 75 basis points two weeks ago. So, we really are going through something like a regime change where we were in a low-yield, low-interest-rate, low-inflation environment to an environment where inflation has been persistently higher than expected.“
Mr Bhundia said yesterday there was a great deal of complacency about inflation, the level of hawkishness that central banks would go to to maintain control of inflation rates and Russia’s intention with Ukraine.
“Those complacencies have actually fed through to assets we all invest in,” Mr Bhundia said.
“I have never seen the cross-asset correlations that I have seen in the last eight months. On a multi-asset class portfolio, there has been nowhere to hide, unless you went into cash.
“There have been pockets of alternatives that have done extremely well, but for your traditional 60/40 portfolio it has been one of the worst years that you have had in a long time.”
He said global growth from the Covid overhang has bounced back sharply, but we are now seeing supply-chain issues having negative impacts on global growth.
“The war in the Ukraine is having a real detrimental impact on Europe’s growing profile,” he said.
Mr Bhundia told club members that the volatility of bonds has also been extraordinary.
“Bonds volatility has shot up quite sharply,” he said. “The last time we saw this kind of bond volatility was the great financial crisis in 2008. So, in a normal portfolio the fixed income did not provide you any type of ballast to try and insulate your portfolio from the downside. You got the draught from equity volatility and you got the draught from bond volatility.”
He said a lot of investors were taken off guard when central banks “put the pedal to the metal” and raised rates at an unprecedented clip.
But he said within inflation there are signs that it is ebbing.
“Gas prices are almost 25 per cent off their peak,” he said. “You can see the euro has come off as well, and oil prices have come off.”
He said studies have found that most people expect that, three years from now, inflation will be back down to 2.8 per cent.
“While inflation is rampant at the moment, most of the literature and data we see suggests it will come lower,” he said.
Mr Bhundia said the general view is that interest rates in the US are likely to peak around 4.25 per cent or 4.50 per cent.
“So we are at 250 basis points today,” he said. “That is another 200 basis points where they are tightening. Tomorrow, the chances are that they will raise another 75, and then they have another two meetings to raise 75 or 50, but to get to a terminal rate of 4.35 per cent.“
He said this will slow activity down by next summer. The central banks want to do this because they have no control over things such as supply chains or oil and gas prices.
“So they are trying to crush aggregate demand,” Mr Bhundia said. “By doing that they are saying they will be able to slow down the pace of purchases thereby feeding into inflation at a lower rate.“