Aurelia Butler

LONDON (Reuters) -Inflation is raging, interest rates are rising and bonds look like treacherous investment waters – all of which make arguments for a dip back into the fixed income vortex intriguing at least.To be sure, it’s been a lousy year so far for most asset classes aside from oil and commodities. But the most interest rate sensitive securities, or long “duration” plays, have been under the cosh. Government bonds have lost 5-6% while U.S. technology stocks are down more than 10% – and fund managers are heavily underweight in both, with a overweight bias for global equities and cash.Mutual fund data shows two consecutive months of outflows from global bond funds – a cumulative $32 billion exit for the year to date.Spiking oil prices, tensions over war in eastern Europe and central banks mapping a return to pre-pandemic monetary settings all stir the water for investors who are once again fearful of an end to the 40-year bond bull market.But JPMorgan (NYSE:JPM)’s long-term strategists take a different tack and screen out all the turbulent news, macro forecasts and tactical trading views to model how mixed portfolios would perform a 10-year view based on past performance.Jan Loeys and team this week updated their view of prospective 10-year returns for a standard 60/40 equity/bonds portfolio and said the recent shakeout in asset prices lifted their expected returns significantly from a year ago. Dispensing with different takes on macro drivers – which may be valid but impossible to predict with any certainty over 10 years – the JPM team insisted the best guide to bond returns over a subsequent decade has historically been the prevailing yield. The jump of more than a percentage point over the past year in yields on U.S. aggregate bond indices – which include Treasury and agency bonds as well as investment grade and high yield corporate debt – now put today’s yield at some 2.7%. Crucially, this makes them positive again in real or inflation-adjusted terms when using 10-year market inflation expectations of 2.4% as a guide.Along with a pullback in U.S. stock multiples that improves their annual return outlook over a next decade to 4.8%, JPM reckons a mixed 60/40 portfolio’s prospects were now 4% per annum. That’s a percentage point higher than last year and 1.6% positive in real terms – even if still unattractive historically and far below the real 5% average of the past century.But their conclusion was this improvement in mixed returns may be enough to dissuade investors from the TINA (there is no alternative) phenomenon that has at least partly driven the equity price boom as bond yields were floored in recent years.”The urge to overweight equities to bring portfolio returns closer to one’s requirements has been softened,” they told clients. “At the margin (it’s) a reason to start rebalancing towards bonds, without having to be in a hurry.”BOUNDARY CONDITIONS?While that’s hardly consensus, the view does chime with some fundamental arguments – such as central banks acting swiftly now; peaking inflation rates and improved real returns; cooling growth and flattening yield curves; and the idea that any positive real yields in “safe assets” are attractive right now to risk averse funds.Dynamics in the “defined benefit” pension fund industry, for example, were widely cited last year as a major factor steamrolling the yield curve and weighing on long-term yields as outsize equity gains hastened full-funding status and a mass “de-risking” of portfolios into bonds alone.For more tactical active managers, there are also signs that this latest volatile period may have overdone the bond gloom.PIMCO chief investment officer Dan Ivascyn said this week that his portfolios remained underweight bond duration but valuations had now become more interesting. “I don’t think we’re too far away from levels where we’ll begin to reduce that duration underweight.”Even chartists mapping 10-year Treasury yields think calling the end of the 40-year bond bull market would premature at least.The main criticism of that long-term JPM view of course is that it relies on past performance as a guide – reasonable unless you think we’re in for a paradigm shift in the world economy where bond yields and credit spreads have nowhere to go but up.Newton Investment Management Chief Executive Euan Munro wrote this month that markets had hit such “boundary conditions” and that should force a rethink of 60/40 portfolios towards a more diverse and actively managed fixed income portion at least.His main bone of contention with modelling based on historical price performance was that it did in fact assume a questionable view the future repeated the recent past.”Those that apply such an approach are making – or at least implying – quite a detailed forecast of future market conditions, whether they realise it or not.”Place your bets now on 2032.The author is editor-at-large for finance and markets at Reuters News. Any views expressed here are his own(by Mike Dolan, Twitter (NYSE:TWTR): @reutersMikeD; editing by David Evans) More

Domestic investors have sold a total of 1.58 trillion yen ($13.72 billion) worth overseas bonds and equities this year, according to Japan’s Ministry of Finance data till the end of last week. They sold 385 billion yen of equities and 1.2 trillion yen in bond markets, the data showed. The total selling of 1.58 trillion yen has already surpassed last year’s entire sales of 1.5 trillion yen. (Graphics: https://fingfx.thomsonreuters.com/gfx/mkt/mypmnjynevr/Japanese%20investments%20in%20overseas%20assets.jpg)While the major central banks are moving into inflation-fighting mode, and starting to lift their ultra-low borrowing costs, the Bank of Japan (BOJ) is in no hurry to follow suit. Inflation in Japan remains distant from BOJ’s 2% target, its deputy governor Masazumi Wakatabe said earlier this month.”Due to the combined effect of rising global yields, Japanese government bonds (JGBs) now offer more attractive returns to local investors,” Antoine Bouvet, senior rates strategist at ING, said in a report. “Combined with the risk of greater losses on bonds denominated in U.S. dollar and euro, this could make JGBs an increasingly attractive alternative.”Analysts also said currency hedging costs have increased for domestic investors, due to the rise in interest rates in overseas markets.Another reason for the drop in Japanese investments in foreign equities is the relatively bigger declines in overseas markets. The Nikkei index has fallen 5% this year, compared to the MSCI World’s 6% drop.Last year, Japanese investors sold 3.61 trillion yen of U.S. equities but bought U.S. bonds worth 6.85 trillion yen. During the same time, they sold equities and bonds worth 538 billion yen and 1.76 trillion yen, respectively, in the European Union.(Graphics: https://fingfx.thomsonreuters.com/gfx/mkt/xmpjojyodvr/Japanese%20investments%20in%20US%20and%20European%20assets.jpg)($1 = 115.1800 yen) More

Sales of NEVs, which include battery-powered electric vehicles, plug-in petrol-electric hybrids and hydrogen fuel-cell vehicles, in January reached 431,000, representing an annual increase of 135.8%, according to data of the China Association of Automobile Manufacturers (CAAM).December sales surged as buyers rushed in ahead of a subsidy cut that took place in January, Cui Dongshu, Secretary-General of another industry body China Passenger Car Association (CPCA) said on Monday.In December 518,000 NEVs were sold in China, increasing 159.5% year on year.China has ambitious goals in promoting NEVs as part of efforts to curb air pollution and believes the industry has matured enough to be driven by demand rather than subsidies.Total automotive sales in the world’s biggest car market rose 0.9% in January from a year earlier to 2.53 million vehicles, their first uptick after eight consecutive months of declines, according to CAAM.In January, demand kept increasing before the lunar new year and the supply of chips continued to improve, CAAM said in a statement. But sales growth slowed thanks to impact of COVID epidemic in some areas, it added.A global shortage of chips, used in everything from brake sensors to power steering and entertainment systems, has led automakers around the world to cut or suspend production, pushing up prices and hurting sales.On Monday, data from CPCA showed that U.S. electric vehicle maker Tesla (NASDAQ:TSLA) Inc sold 59,845 China-made vehicles in January. Tesla is the only foreign automaker among the top ten best selling NEV brands in China thanks to fierce competition, as local manufacturers such as Nio (NYSE:NIO), Xpeng (NYSE:XPEV) Inc and Li Auto Inc cater to Chinese consumers with products more tailor made to local tastes. More

Renault has warned of a potential supply chain crisis for its plants in Russia if the dispute with Ukraine deteriorates.The French carmaker said its Russian business AvtoVaz could face problems securing components for its two factories in the country.About 90 per cent of the sales from the AvtoVaz plants, which make the Lada brand, stay in Russia, and the company is financed largely from the country, chief executive Luca de Meo said on Friday.But “potentially there could be another supply chain crisis linked to parts that would have to come from abroad”, he told investors. As well as two AvtoVaz plants, the company owns a dedicated Renault facility in Moscow.Russian president Vladimir Putin has tried to shelter the country’s economy and industries from potential sanctions through a “Fortress Russia” programme that reduces links with outside businesses.However, car plants such as Renault’s still rely heavily on imported components, because of the scale of the global business.De Meo told the Financial Times that Renault was “doing a study, just a preventive move” to assess where else it can source parts for the plants. About 20 per cent of parts for the AvtoVaz plants are imported, while it is close to 40 per cent for the Renault Moscow facility.“We are looking at this piece by piece, if it comes from China, it is not the same as if it comes from Germany or the US,” he said.The supply chain warning came as Renault reported its first annual profit in two years with cost-cutting and a focus on its more lucrative models offsetting the global chip shortage that has beset the car industry.The French carmaker’s net income was €967mn last year, a sharp reversal from an €8bn loss in 2020, when the lockdowns designed to stem the spread of coronavirus hammered manufacturers.The group, which also lost money in 2019, said on Friday that a turnround strategy based on delivering “value over volume” was ahead of schedule. Some parts of the plan were two years ahead of schedule, de Meo said, and the company would “go above the initial €2bn target” for cost cutting.“All this is the result of titanic work in the past 18 months,” he added. “Renault Group largely exceeded its 2021 financial targets, despite the impact of semiconductor shortages and rising raw material prices.”About 85 per cent of vehicles were higher specification models, leading to a pricing increase of 6 percentage points. The higher mix improved profits by €1.1bn, while increased productivity boosted earnings by €850mn.Higher raw material prices cost the group an additional €470mn.Its profit margins hit 3.6 per cent last year, ahead of the 2.8 per cent it had forecast, and the group is targeting 4 per cent this year. Sales rose 6 per cent to €46.2bn, as the carmaker benefited from the reopening of major economies.However, Renault warned it still expected to produce 300,000 fewer vehicles this year due to the chip shortages that dogged the industry over the past year.About a third of its vehicles sold in Europe last year were hybrid, helping the group meet CO2 targets set by EU authorities. It plans to launch 15 electric cars by 2025, with the aim of selling only battery vehicles in Europe by the end of the decade.The group is exploring carving out its engine and hybrid business into a separate unit, based outside France, de Meo said on Friday. The potential split echoes Volvo Cars, which separated its engine cars and battery cars divisions into two units.

Video: Cars, companies, countries: the race to go electric More