Rising bond yields are uprooting an investing trend that has dominated for more than a decade, writes Sam Benstead.
The investment industry loves an acronym. Some stick around and capture the investment zeitgeist and are genuinely useful for understanding the bigger themes in markets, while others fail to take off.
Successful ones include the FAANGs, referring to the supersonic rise of US big technology stocks (Facebook, now known as Meta (NASDAQ:META), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX) and Google owner Alphabet (NASDAQ:GOOGL)), and the BRICS (Brazil, Russia, India, China) that rose to prominence in the 2000s on the back of a commodities boom.
Acronyms that failed to take off include the GRANOLAS: GSK (LSE:GSK), Roche (SIX:ROG), ASML (EURONEXT:ASML), Nestle (SIX:NESN), Novartis (SIX:NOVN), Novo Nordisk (NYSE:NVO),L'Oreal (EURONEXT:OR), LVMH (EURONEXT:MC), AstraZeneca (LSE:AZN), SAP SE (XETRA:SAP) and Sanofi (EURONEXT:SAN). This was a list made by Goldman Sachs to group Europe’s top companies.,
Another lacklustre acronym was the MINTs: Mexico, Indonesia, Nigeria and Turkey, a group of country’s selected by Fidelity in 2011 that were expected to thrive due to young, large populations and geographic advantages.
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The jury is still out on “the new FAANGs”. Standing for Fuels, Aerospace, Agriculture, Nuclear and renewables, and Gold and minerals, they represent the business sectors benefiting from geopolitical tensions in Europe, as well as the winners from the race to secure energy independence from Russia and develop more renewable energy. Bank of America coined the term this year.
One popular acronym that is credible and has been doing the rounds over the past couple of years is TINA: there is no alternative. It refers to the lack of investment opportunities outside the stock market.
As interest rates fell following the 2008 financial crisis, and inflation never took off thanks in part to globalisation and the falling cost of goods, the stock market was far more attractive than the bond market, where yields collapsed along with interest rates.
But as interest rates rise, and with them bond yields, TINA could be on its way out. Replacing it, according to the fund group Ruffer, should be PATTY.
Standing for “pay attention to the yield”, Duncan MacInnes, manager of Ruffer Investment Company (LSE:RICA), says that because the return on safe investments has now shot up, there really is a strong alternative to chasing returns from risk assets in a zero-interest world.
Investors can now get around 4% lending money to the US government for two years, and about 3.5% lending to the British government. Just a year ago those yields were 0.5% and 0.7%.
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MacInnes, writing in financial news publication Citywire, said: “Since the financial crisis, an oft-repeated mantra has been ‘TINA’ – there is no alternative. The slogan, borrowed from Margaret Thatcher, summarised the phenomenon whereby in a zero-interest-rate world, investors are forced up the risk curve. Investors leapt from sovereign bonds, to credit, to high yield and finally to equities in pursuit of income. A whole industry of ‘alternative income’ and ‘private credit’ blossomed. Some are now wilting.”
He also says that cash is now more useful because it gives an investor the ability to act swiftly to take advantage of opportunities, such as buying gilts following the mini-budget. He says that holding cash is also an acknowledgment that the investment opportunities tomorrow may be better than those today.
MacInnes said: “When attractive situations appear, you can allocate in size. As Warren Buffett said: ‘When it’s raining gold, reach for a bucket, not a thimble’.”
MacInnes makes strong points. In a world where investors can get 4% “risk free” by lending to the government, and even more by buying the bonds of the safest “investment grade” corporates, buying shares whose outlook is highly uncertain as we head into a recession makes much less sense than a year ago. Having cash on hand to profit from volatile markets also makes sense, so long as investors can spot the right opportunities.
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So is TINA over? A lot of the value in bonds today hinges on what inflation does over the next couple of years. If it rages higher, then interest rates will go even higher and bond investors may get higher income if they hold off investing in bonds now and bank a higher yield in the future.
While bond prices could fall still further, the income on offer – particularly given rising inflation and falling stock markets – makes bonds a genuine alternative to owning shares, finally.
Investors are also voting with their wallets, with money finally flowing into bond funds
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