JP Morgan: Uncertainty is Good for Bond Markets

Political and stock market uncertainty is rising - but this is good news for fixed income says Andreas Michalitsianos, manager of the JP Morgan Sterling Corporate Bond Fund

Emma Wall 16 May, 2017 | 11:33AM
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Emma Wall: Hello, and welcome to the Morningstar series, 'Why Should I Invest With You?' I am Emma Wall and I'm joined today by Andreas Michalitsianos, manager of the JP Morgan Sterling Corporate Bond Fund.

Hello, Andreas.

Andreas Michalitsianos: Hello.

Wall: So, what sort of yield can investors expect from U.K. corporates at the moment?

Michalitsianos: The current yields are around 2.5% to 3%, depending on what part of the – what maturity of the corporate bond, but that's the general vicinity that we're talking about.

Wall: And of course, inflation is coming up, but the rest of yield, if you look at government bond yields, they are still pretty low. So, there is some attractive yield there.

Michalitsianos: I think so. I think in this environment, where growth overall in the global economy seems good and corporate bonds are actually a nice way to pick up an additional amount of yield above government bonds. And I think total returns should be well-supportive in this growth environment for corporate bonds.

Wall: And you mentioned the growth environment now, how important is the point in the economic cycle when it comes to making investment decisions as a corporate bond manager?

Michalitsianos: Yes. So, when you think about U.K. corporate bonds, it's actually a little bit of a misnomer, because only half of the market is domestically-orientated. It's actually a global universe of bonds that we're talking about. So, what really matters in this environment is how well the global economy is doing. And on that front, we can say, it's doing pretty well. And so from my standpoint, when I look at buying corporate bonds in the U.K., I am actually – it gives me a lot of encouragement. So I'm – I actually – I'm buying more corporate bonds than I was a year or so ago in the portfolio.

Wall: Now, you mentioned the global outlook is good and we have had forecasts, which support that. However, there's a lot of uncertainty at the moment. You've got President Trump in the White House. You've got sort of geopolitical rumblings ongoing in the Middle East. With a portfolio, as you say is, maybe U.K. listed, but globally looking, how do you take that uncertainty into consideration?

Michalitsianos: So, if I put myself in the shoes of an end investor, what I can say is that bonds, overall, they actually love uncertainty. So, unlike the stock market, which may falter in times of uncertainty, what you get in the corporate bond portfolio is the government component of yields, which are the baseline for yields, they will actually do well in an uncertain environment.

And so, when you combine – it's a strange mix of uncertainty and good growth and it's actually the perfect environment from a corporate bond standpoint, because government rates aren't likely to rise very much, but the spread or the premium you earn for lending to a corporate is likely to contract, which is positive for price returns.

Wall: Why do they like uncertainty? Is that because they are seen as a safe haven, and so in times of uncertainty, demand goes up for safe havens?

Michalitsianos: Well, absolutely. And I think if you even look at the inflation report and the latest MPC meeting, what you can see is that the banking, they really don't know what's going to happen, okay. So, they are unlikely to raise rates anytime in the near future.

If they're unlikely to raise rates, that means that the government bond yield curve will not be moving up. And when it moves up, that's actually bad for your returns. So, what we can say is, we think that in the U.K. at least the government bond market is probably fairly well-supportive, and on top of that, UK corporates pay you an additional premium, which I think can be very attractive in this environment.

Wall: Now, a bond manager is sounding positive, sounds great, but I have to ask, are you being too positive? You're saying uncertainty is good for corporates. You're saying that global growth is good for corporates. Are there any headwinds on the horizon?

Michalitsianos: Well, I think, it's actually very interesting. We've just come through the French elections and what you hear most investors saying is, for the first time in a long time, I don't have much to worry about, but there will always be – there will always be elements of uncertainty out there. So, from my standpoint, it's really the unknown that I think can take the market by surprise, and whether that’s geopolitical risk or some of the fallout in the Trump administration.

But as I say, that's actually in a strange way, it's good for the government bond side. And what you really want with the corporate bond portfolio is good growth. So as long as growth holds up, the premium that the companies are paying you will continue to provide you with good return on the government side of – the government interest rate side of your risk is not likely to run away and hurt you very much. So, it's actually – strangely, the mixture of uncertainty and good growth is very good for corporate bond returns.

Wall: Andreas, thank you very much.

Michalitsianos: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar