Mountstone Partners create and manage bespoke investment portfolios for wealthy families, charities and trusts. CEO James Keen publishes a monthly investment update for their clients. Here is James Keen’s February Newsletter – please contact him if you have any queries about the markets or indeed the portfolio.
It has been the worst start to a year for equity markets since 2008. All major indices have fallen on fears of continuing slowdown in China, potential default concerns surrounding the European banks, political risk emanating from a potential Brexit and a weak corporate earnings season. Over 1 year the Hang Seng has fallen 22.6%, The FTSE 100 by 15.2% and the S&P 500 by 10%.
With this backdrop it is understandable to worry about the future prospects for markets in 2016, however in the short-term investors will often overreact in such conditions. We believe that this is the case now, epitomised by Japanese equities trading on their lowest price to earnings ratios ever at the same time as Japan having its best macroeconomic conditions for decades.
However, in this edition of our regular market overview we have focused on an asset class that is often considered uncorrelated with equities – high yield bonds. These debt instruments are fixed interest investments and therefore often mistakenly seen as a hedge/protection against falling equities. We attempt to dispel that myth and argue that high yield bonds should be considered as a “risk-on” asset just as equities are. They can (and have) delivered excellent returns in the right economic conditions but over the past 12 months, high yield has had a torrid time, just like equities. Those investors who own large exposure in this asset class should therefore be very aware of what they own.
Will high yield bonds recover if equities start to perform well again? We consider the various factors influencing demand and prices of these investments and determine whether or not they now look good value after a prolonged period of poor performance.