Bonds will be a compelling asset for investors as economies near potential recession next year, according to Pendal.
On a recent podcast episode, Pendal portfolio manager, Oliver Ge, predicted strong yields from bonds when looking towards mid-2023.
He identified that this current period was a “crushing experience” for any investor, with extreme volatility present in all asset markets.
“We’re approaching a golden period of bond returns because our research shows that there is going to be a deep, synchronised global recession around the corner and in the second half of 2023,” Ge forecasted.
With the US economy in a technical recession, European nations predicted to follow suit and China who continues to “drive with its brakes on”, 77% of investors were anticipating a global recession.
“The long-term implication for this is that the best-performing asset class, in a recession, is bonds,” the portfolio manager reiterated.
Higher-yielding bonds would be “incredibly conducive”, to higher returns, according to Ge.
Returns were expected to hit 5%-6% at minimum. If Australia’s economy were to fall into a recession, Ge forecasted even higher returns closer to 10% – a promising prospect for investors.
“We are witnessing yields at a decade-high from government bonds,” he said, which were expected to rise even further.
Investors were recommended to hold off investing until inflation reached its peak. Despite this, Ge noted there were signs that inflation had peaked and was due to come off in the next few quarters.
“That would invariably take us to a position, in Q2 2023, where it looks quite compelling for us to own bonds. At that point, you’d already see inflation pressures come off and growth indicators start to materially deteriorate,” he said.
An environment where central banks implemented more “benign” and dovish monetary policy would be very conducive to owning bonds.
Pendal recommended government bonds as an attractive asset class in which “investors can benefit the most.”
