No such thing as a certainty

INVESTING is all about balancing probabilities, but this doesn’t always sit well with the industry.

Clients who entrust their funds to investment managers like to feel they have some certainty about the progression of their wealth. Fund managers who buy research from investment banks want a target price for their purchase or sale.

This year’s salutary lesson has come from the bond market.

I’m pretty sure that in January nobody was forecasting several short-dated UK Gilts would now be trading with a negative yield to maturity; many pundits were predicting that yields would rise. A big bet in that direction would have been very costly.

Many high-profile investors have been betting against Japan’s Government Bond (JGB) market for years, speculating that low yields were unsustainable in the face of a burgeoning budget deficit, but they didn’t reckon with the Bank of Japan continuing to hoover up every available bond, to the extent that a bet against the JGB market has commonly become known as the “widow-maker”.

Whatever “fundamentals” might be saying, the forces of Quantitative Easing have prevailed, and the same thing seems to be happening to the gilt market.

Last week I noted that we see a rising risk of a period when bond and equity markets could fall in tandem.

We are not predicting this will definitely happen, just that the probability is increasing owing to the very low yields in bond markets and the rising valuation of equities.

Of course, I could put a more positive spin on all this.

One potential outcome is that growth remains dull but stable, interest rates remain low and central banks continue to pump out more money than is needed for investment in the real economy.

In that case the excess cash will continue to seek returns in higher yielding safe financial assets and shares could continue to “melt up”. John Wyn-Evans is head of investment strategy at Investec Wealth & Investment