There is not enough time to reinflate the European economy before the next recession — which could be in the next two to three years — despite efforts by the European Central Bank, indicating that the economy is likely to end up in a low-inflation equilibrium, J.P. Morgan Asset Management strategists warned.
Bond markets of different maturities are becoming more correlated even though the ECB and U.S. Federal Reserve have divergent rate policies, experts said at a news conference held by the money manager Tuesday in London. Income-generating fixed income is becoming a buy-and-hold type of instrument.
“As much as 30% of the bond market is yielding low at present,” said Thushka Maharaj, global strategist in the multiasset solutions team based in London. “Yield of 1.6% is considered high.”
Strategists added that real inflation-type opportunities are being created only in the U.S. and investors are relying on it too heavily, despite the fact that European equities have a better short-term outlook.
“Europe should be outperforming the U.S. in the equity space,” said Stephanie Flanders, a managing director and chief strategistfor the U.K. and Europe.
Ms. Maharaj added that in this environment, frontier markets are successfully attracting attention from investors by issuing income-generating debt. Kenya, despite its frontier market status, has found that its bonds with the right level of yield and duration fit into a typical developed markets fixed-income portfolio.
Emerging markets’ road to recovery has indeed become apparent in the last two quarters.
“We begin to see central banks cut rates in places such as India and Indonesia, which supports this view,” said Pierre-Yves Bareau, managing director and chief investment officer for the emerging markets debt team.
Mr. Bareau cited Latin America’s good governance and the right amount of fiscal spending as key factors behind that region’s cheap valuation.