Investors should increase risk as some traditional safe havens are losing their shine, Robeco says in its five-year outlook titled ‘A Brave Real World’. Investment Officer spoke with Peter van der Welle, strategist in Robeco’s Global Macro team, about the asset manager’s outlook.
‘Cash and bonds are normally the ultimate safe havens, but after a very long bull market in bonds that is now less the case as there is a potential for inflation. And nominal yields may reflect that,’ says Van de Welle. ‘However, the Fed and the other central banks have a low tolerance for higher nominal yields. So we believe it will be contained, with a 10-year Treasury yield that will not exceed 1.5%. Still, this will lead to predictably negative government bond returns, also given the low starting coupons. So we are going to see a transition from risk-free returns to return-free risks.’
Volatility
Robeco’s strategists warn that volatility in traditional safe havens may increase. ‘The Fed wants to create an inflation overshoot. That can lead to volatility and losses when you hold bonds to maturity. In that context, inflation-linked bonds can be interesting. The break-evens are still below the level of inflation of 1.75% in developed economies that we expect on average for the next five years. But beware, linkers remain vulnerable to a moderate rise in real interest rates that we foresee in the second half of the projection period,’ Van de Welle warns.
Technology
Technology stocks, especially large caps in the US, are the new perceived safe havens thanks to their huge cash flows and the fact that they benefit from digital trends. ‘Watch out though, because these stocks are going to be very volatile too. They are also risky.’
Taking a risk
Van der Welle does indicate that it ‘will probably pay off to move further up the risk curve from a mean variance model. Equities from developed and emerging countries, commodities and, to a lesser extent, high-yield bonds can benefit.’
‘Local currency emerging market bonds are also still interesting but less so than last year. However, we see little potential in developed market sovereign debt. We have also downgraded real estate. Post-Covid we will see fewer people in the office. This period shows that the potential of technology had previously been under-utilised.’
Value shift
‘After an initial disinflationary period, we can end up in a different environment that is more inflationary,’ predicts Van der Welle. ‘This can lead to a rotation from growth to value. Once group immunity is widely spread, a broader-based economic recovery can finally be achieved. This can reduce the relative premium on growth stocks, which has pushed these stocks higher. In combination with rising interest rates, there may be a turnaround towards value.’
The dollar may also come under pressure from its twin deficits (fiscal and current account deficits). ‘In the run-up to the rotation to value, we may therefore end up in a dollar bear market. The dollar is overvalued on the basis of purchasing power parity. It is about 15% overvalued on a long-term basis. Over the next five years, that overvaluation could erode, allowing high beta assets such as emerging countries, whose relative valuation is quite favourable, to start outperforming. So I agree with Jeremy Grantham of GMO when he says that emerging market equities with a value tilt are interesting.’