The perceived loss of faith and confidence in central banks' ability to deliver long-term stimuli to the markets means money managers and investment consultants are addressing these concerns with institutional investor clients.
Recent moves to boost growth and inflation by central banks should lead to long-term bond yields moving higher, but this hasn't happened, said David Riley, head of credit strategy at BlueBay Asset Management LLP in London. Bank stocks continue to underperform the broader market, “and they are a very cyclical sector which should benefit form a stronger recovery if that was going to be the impact of central bank policy actions.”
At the lower end of the credit spectrum, in distressed bonds such as B and CCC rated issues, spreads have narrowed from their widest in February. However, he said that has not been a dramatic narrowing, and these assets have not outperformed the market “which typically we would see in a market rally — the most beaten up assets would rally the most.”
In BlueBay executives' view, “it feels a little bit fragile,” leading to caution and a focus on fundamentals within the firm's portfolios. Investors should also expect further episodes of volatility, despite the current period of “relative calm,” said Mr. Riley.
Willis Towers Watson PLC's central outlook is that, over the next five years, there is likely to be a growth shock. Central banks will be able to act after this shock, “but the ability to offset that as and when it is happening, we think, is pretty low,” said Tom Brooke-Smith, senior investment consultant in London. “That is part of the reason we are recommending to investors that they consider the impacts of a significant shock or recession.”
Mr. Brooke-Smith said one of QE's aims is to push investors further out on the risk curve, by purchasing other, safe-haven assets. “It is one of the things we are really concentrating on with investors — have you set up a (strategy) with target returns, and do you think you are able to make that return with a suitable level of risk for your pension scheme? We don't want to perpetuate into a cycle of searching for return and potentially taking unrewarded risk,” he said.
Willis Towers Watson is working with clients to determine whether it is appropriate to alter that return target, or to accept that they may not meet it in the near-term. “Are you prepared for a recession, given that we have quite a high likelihood of a recession in the next five years? It all wraps up into one package — something all of our consultants are focused on at the moment,” said Mr. Brooke-Smith.