Bond bubbles and banks – concerns and opportunities in the investment landscape, November 2016

There are definitely some areas of the global economy that are showing signs of 'bubble' territory, according to Hugh Sergeant, manager of Elite Rated River & Mercantile UK Long Term Recovery fund. 

A 'bubble' is characterised by a rapid or prolonged escalation of prices in a particular asset, which is unsustainable. When an investment bubble pops, prices can fall just as rapidly as they rose. The bubble that most investors will remember is the technology bubble of the late 1990s, which burst at the turn of the millennium.

According to Hugh, the biggest area of concern now is sovereign debt. Indeed, more than half of the world's sovereign bonds are now in negative territory according to another Elite Rated manager, Ian Spreadbury, whose Fidelity Strategic Bond fund is on Chelsea Selection.

The search for better yields has, in Hugh's opinion, caused the bubble to spill over into bond proxies – stocks of companies such as utilities, which are presumed to resemble bonds in terms of their ability to provide low-risk income, but which have a higher yield. Hugh believes that expectations are now so high, however, they will have to start to disappoint.

As the name of the fund suggests, Hugh looks for companies that are yet to deliver their promise: out-of-favour companies where he believes the management have the capability to turn things around and which he believes the market is undervaluing.

However, at the moment, these opportunities are hard to come by. “The UK stock market is expensive in my view,” Hugh says, “so I've been using the 20% allocation I am allowed to invest in global companies to full effect in the fund recently. We could have switched our focus to UK domestic companies following the sell-off post-Brexit vote, but I think that would have been the wrong thing to do. Retailers and consumer companies like supermarkets and restaurants are still experiencing a lot of over-supply and aren't recovery options just yet.

“On the other hand, banks are looking interesting. I think we are close to a time when banks will start to outperform. The scope for interest rate rises is looking better and the business case is looking stronger. I like both traditional and challenger banks and around 13% of the fund is invested in this sector.”


Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Hugh's views are his own and do not constitute financial advice.
Published on 08/11/2016

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