Investors around the world had gotten used to the low interest rate environment in recent years, and there was no alternative to investing in shares. But times have changed: After offensive interest rate hikes, bonds are again yielding more attractive returns. The experienced investor Howard Marks therefore advises a rethink.
• Investment expert Marks praises the reliability of income from bond purchases
• Return to higher interest rates offers great opportunities for investors
• Even bonds from stable countries and strong companies were worthwhile again
TINA – There is no Alternative – was the catchphrase for many equity investors during the low-interest phase between 2009 and 2021: Since bonds, fixed-term deposit accounts or life insurance no longer yielded any returns, an investment in company shares – or even real estate – was considered by many experts as without alternative. However, the turnaround in interest rates, which was initiated in spring 2022 with the first interest rate hikes by the US central bank, the Fed, has caused considerable confusion in the market environment.
Marks: Bond yields are ‘more reliable’
Risk-averse investors in particular, who prefer the guaranteed returns of bonds to the performance of shares, which are considered uncertain, now have good opportunities again. This is also emphasized by the co-chairman of the US investment company Oaktree Capital, Howard Marks, in the company’s own Oaktree podcast. Meanwhile, investors in bonds that aren’t too risky could get equity-like returns on a “contractual, more reliable basis, and that’s something new compared to the past few years,” Marks said.
Marks also expects higher interest rates in the future
He sees the interest rate comeback as a return to normalcy. In the last 40 years of his activities on the capital market, interest rates have fallen constantly, this development is now finally over. “When you see something for 40 years, you tend to say, ‘Well, that’s normal,’ but it’s not,” the investment veteran points out. “And the only thing I’m sure of is that interest rates aren’t going to go down another 2,000 basis points,” he said. “In 1980 I personally had a loan at 22.25 percent and in 2020 I was able to borrow at 2.25 percent, so rates are down 2,000 basis points. It’s not going to happen again, there’s no room for that .” Rather, Marks assumes that interest rates will generally show a rising trend again in the coming years. The key interest rate in the USA is currently between 5 and 5.25 percent, in Euroland the value is 4 percent.
Weak stock years ahead?
Unlike the secure income from bonds, Marks is skeptical that stocks will perform well in the years to come. The time of the ultra liquid monetary policy, which enabled companies to obtain credit cheaply, will have an impact. Mark’s colleague David Rosenberg, portfolio manager at Oaktree Capital, agrees. For stocks where returns depend on growth, “we’ve seen a lot of growth because money was free, and when money is free, people borrow a lot,” Rosenberg explains on the Oaktree podcast. He adds: “With debt, you don’t need growth”. Therefore, bonds that are also called debentures a very good risk/opportunity profile in times of economic slack.
Even safe bonds are once again generating positive returns
Rosenberg is considered a recognized expert on high-yield bonds – that is, bonds issued by companies with an uncertain future that reward risk-taking investors with high returns. In 2021, Rosenberg was still “joking” when he suggested renaming the asset class “medium returns”. At that time, even high-risk bonds only offered a return of 4 to 5 percent, which was disproportionate to the risk. Since the turnaround in interest rates, however, these have risen again to 9 to 10 percent and are now a good investment option for experienced investors with a high risk appetite.
But even much safer bonds, such as those from companies with the highest credit rating “AAA” such as Microsoft or Johnson & Johnson, are now offering significantly higher returns in the mid-single-digit percentage range. Even government bonds from countries that are considered to be extremely safe and stable are once again yielding returns. For example, investors can currently earn 2.45 percent per year with ten-year German government bonds, and this value is even 3.85 percent for ten-year US Treasuries (as of July 4, 2023).
Although the expected return on the stock market is somewhat higher at around seven percent, there is no doubt that there is no longer any alternative to investing in the stock market for institutional or private investors. Bond king Jeffrey Gundlach shares this view and even recommends a portfolio weighting of 20 percent equities, 60 percent bonds and 20 percent gold.
Editorial office finanzen.net
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