Fidelity’s Greetham: Expect the worst bond returns in generations

Trevor Greetham

Fidelity head of tactical asset allocation Trevor Greetham has warned that the end of easy money is likely to spur on “the worst bond market returns in generations”.

Ten-year treasuries have already lost investors some 10 per cent since May when the Fed initially cited a willingness to taper quantitative easing later in the year.

However, Greetham says: “The gradual normalisation of US monetary policy is likely to set in train the worst bond market returns in generations.

“If previous episodes offer any guide we could be two-thirds of the way through the sell off. If yields head back to the 2003-7 average of 4.5 per cent we may only be half way through and a stop-go bear market could last for many months to come.”

As result of his bearish sentiment towards government bonds, Greetham has been reducing his allocation to the asset class since last October and this month he stripped his weighting to the bare minimum across the group’s multi-asset range.

Greetham however anticipates that shares will come out of the adjustment period relatively unscathed.

He says:”Valuations never really factored in artificially low bond yields as investors did not expect them to be sustained over the long run.

”Scepticism showed up in the form of an extremely high-equity risk premium. Stocks became extremely cheap when viewed relative to increasingly expensive bonds.”

Greetham believes stocks are fairly valued in absolute terms with the US earnings yield close to its long run average. He adds: “Negative real bond yields were the anomaly and this is where the adjustment is taking place. But real bond yields would have to rise by a further 200-300 basis points to make stocks expensive in relative terms.

“In short, stockmarkets did not revalue upwards when bond yields collapsed. We see no reason why they should revalue downwards as bond yields revert to the mean.”

The rebound in the developed world and the recent market weakness has driven the fund manager to move his equity positions to large overweights in the US, the UK and Japan.

He says: “We added to equities and commodities this month to take risk assets back overweight from neutral. We are long stocks and cash with underweight positions in commodities and bonds.

“With global growth broadening we have trimmed our overweight positions in US and Japan equities to shrink underweights in Europe and Asia Pacific.”

Greetham has however been underweight emerging markets since May as a result of their relatively weak state compared to the developed world, with China in particular guiding growth lower over recent months.

“A stabilisation in Chinese activity could see a period of outperformance for Asia Pacific equities,” he says.

“However, stronger global growth is only likely to speed up the pace of US liquidity withdrawal and this is negative for the emerging markets, particularly twin deficit countries like India, Turkey and South Africa.

“We prefer to overweight the developed markets. We favour the US, UK and Japan where growth is picking up and policy remains loose.”