By: Natalie Harrison, Global Fund Specialist at Momentum Investments
The notion of a ‘safe haven’ in investments has traditionally implied an asset’s ability to maintain or increase in value, especially when other investments are facing decline. This principle has led to the longstanding practice of pairing equities with fixed income securities like bonds in multi-asset portfolios, with bonds traditionally providing diversification benefits and a shield for portfolios when equities face downturns. The effectiveness of this strategy is well demonstrated in historical data, as illustrated by my colleague Alex Harvey, Senior Portfolio Manager & Investment Strategist at Momentum Global Investment Management.
Alex’s analysis spanning back to 1946 illustrates a consistent pattern: drawdowns in the US equity market, represented by the S&P 500 (the purple line in the graph), have often been counterbalanced by upswings in the US treasury bond market (the blue line).
However, recent years have witnessed a significant reevaluation of bonds as a ‘safe haven’ asset class with the reliability of bonds to act as a ballast within portfolios being called into question. In 2022, global bonds*, experienced their most challenging year ever, down 16.9% in US dollar terms. Global equities** faced a similar plight, losing 18.1% in US dollar terms over the same period. Bonds, therefore, did not provide the expected protection as they had done so in the past.
An era of ‘cheap’ money
This change in dynamics can be attributed to a prolonged period of accommodative monetary policy causing ‘safe haven’ government bonds to become overvalued, particularly in developed markets, as yields stagnated around zero or even negative territory, especially after accounting for inflation. This prompted investors to seek alternative diversification avenues such as infrastructure, gold, and high yield credit.
But the era of near-zero or negative interest rates and unprecedented quantitative easing, eventually gave way at the beginning of 2022. Interest rates across the globe began to rise, correcting the substantial imbalances that had accumulated in markets, including high levels of inflation and asset price bubbles. The resulting tighter monetary policies worldwide led to a sharp decline in fixed income asset prices and, in turn, a notable surge in bond yields (bond prices and bond yields have an inverse relationship). As recently as January 2022, 3-month treasury bills yielded near zero, but are now significantly higher and yielding 5.3% currently, a positive real return adjusted for US inflation.
Similarly, US 10-year treasury bonds are now offering real yields (nominal yields adjusted for inflation) well over 2% with nominal yields around 5%, having breached 5% for the first time since 2007 in October.
These levels firmly position fixed income assets in an attractive valuation territory once again, with yields not being seen like this for many years.
In today’s investment landscape where uncertainty is the only constant, and global events have the power to send shockwaves through markets, the resurgence of fixed income as a meaningful ‘safe haven’ asset class becomes apparent, offering potential for diversification within portfolios, risk management and attractive yields. At Momentum Global Investment Management, we have adjusted our global multi-asset strategies to reflect these changing dynamics, looking to capitalise on the high yields offered by bonds as economies slow, inflation rates continue their downward trend, and rate cuts come into view next year.
While volatility is still expected, global multi-asset funds are offering the best risk-return opportunities in years given the attractive valuations on offer from a multitude of global asset classes, including ‘safe haven’ government bonds. The Momentum Global Managed Solutions fund range offer three well diversified, global multi-asset funds (Cautious, Managed and Growth), providing a balance between capital preservation and growth. For more detailed information on the Momentum Global Managed Solutions fund range, please see our website: Momentum Global Managed Solutions.
*As indicated by the ICE BofA Global Broad Market index
**Represented by the MSCI World NR index
Kindly note that the use of illustrations in this article does not provide a guarantee on investment as product performance is dependent on market performance. Further note that past performance cannot be extrapolated into the future and is not an indication of future performance. Momentum Global Investment Management Limited (MGIM) is authorised and regulated by the Financial Conduct Authority in the United Kingdom, and is exempt from the requirements of section 7(1) of the Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS) in South Africa, in terms of the FSCA FAIS Notice 141 of 2021 (published 15 December 2021).
