Outlook for equity and bond beta challenging, GSFM says

The outlook for both equity and bond beta remains challenging and investors should think about their portfolios with regards as to how to incorporate less beta-sensitive strategies, according to Grant Samuel Funds Management (GSFM) adviser, Steve Miller.

He warned that although growth momentum was moving along nicely and supported corporate earnings, policy challenges, especially in the US, might be significant in 2019.

“This is another way of saying that at the margin bond investors need to contemplate portfolios that are more flexible and access diverse sources of risk and not be tied to durations of particular indices,” he said.

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Miller also noted that obtaining beta exposure through exchange-traded funds (ETFs) may not be sufficient going forward.

At the same time, equity investors should look at portfolios that could benefit from “stock-picking” acumen or the ability to offset long exposures with short ones, reducing exposure to equity beta.

In terms of correlation between bond and equity returns, it’s hard to predict the current scenario, Miller said.

“In the US, if we do get higher inflation, we may well be migrating back to a period of positively correlated bond and equity returns which, unfortunately in the near term, probably manifests itself first as negative bond and equity returns: inflation, spurred on by a misplaced fiscal stimulus, surprises on the upside leading to an exaggerated increase in bond yields that derail equity markets,” he said.

“On a global scale, therefore, projections of how that return correlation unfolds is difficult. Suffice to say, however, that the commonly held assumption of negative correlation is certainly not inviolable.”

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