Bond is Back (Almost)!

Yes indeed, bond(s) are back.  The bond market (as measured by the UK gilt market) returned 7% last year – yet interest rates remained at 0.75% (bonds and interest rates are inexorably linked).  It was an extraordinary performance in what has been, on reflection, an extraordinary year.  Again, investors have misread the direction of interest rates and under-estimated the willingness of central banks to reduce interest rates into negative territory.  I have lost count of how many times investors have cautioned against holding bonds yet the asset class keeps on, like the namesake, bouncing back and saving the world.

My previous newsletter was optimistically entitled ‘Brexit – The Endgame’.  Well, it does seem that hope has won, resoundingly, over expectation in that the country has the means with which to move forward with Brexit and, most importantly, a majority in parliament that has Brussels sitting up and taking note.  We, too, should take note.  The transition period will end next Christmas and there are bound to be fireworks between now and then.

I suspect, though, that other matters are likely to take over the headlines thus provide some time off for dear Laura and Katya.  As one commentator noted “Brexit will be demoted to page six of the broadsheets”.  It will cease to exist in our consciousnesses – perhaps that is not such a bad thing given that, from an investment perspective, Brexit is but one smallish element of a global trading system.

The global economy is stumbling forward like the final straggler at a Christmas party.  It is suffering from the punch bowl overflowing with cheap money.  However, that has not cured the lack of growth caused by ageing populations and the adjustment to the 4th industrial revolution, amongst other things!   The largess of central banks in handing out cheap money has done little to stimulate growth (but might have avoided a disastrous period of deflation).  The decision for central banks is tricky: do they continue to reflate, thus lowering interest rates even further into negative territory or do they end stimulus, increase rates and watch a stockmarket take fright?  Mr Bailey at the Bank of England shall be occupying a hot seat.

Closer to home 2019 has been the year to keep one’s nerve.  I might be accused of inactivity but holding firm through 2019 has been a successful strategy.  The portfolios were positioned well at the start of 2019 – fortunately I am quite deaf to noise: this time last year every ‘expert’ was declaring the end of the bull market and to “sell all equities” (and many had already sold all bonds).  Indeed, investment returns throughout 2019 have been nothing short of spectacular.  The total return of the FTSE100 has been 18%: the model portfolios of this firm have grown between 15% and 21% over the course of 2019.  This makes 2019 the second best year across the portfolios in the decade.  Important note – the actual returns earned by your investments will differ due to charges and stock positioning.

I think many readers might ‘do a Roger Moore’ at these figures (for those of my readership who are not hip to the lexicon: to do a Roger Moore is to raise an eyebrow and I apologise for the analogy but as we look forward to the next Bond film I couldn’t resist).  Why, though, this HUGE disconnect between expectation and reality?  Partly it is because the doom and gloom of Brexit has fogged our vision.  Also, 2018 was a poor year and investment markets managed to recover during 2019.  The recovery was the realisation that low and lower interest rates would support investment valuations.  We should, therefore, treat 2020 with some trepidation if central bankers have a bad day (again).

2020 also brings with it some exciting developments at Longbon & Company.  We have developed a valuation and reporting system that shall (should) enable you to view and interrogate valuations from the comfort of your computer, tablet, and ‘phone.  It is my intention to roll this out in the first quarter of next year and I think you will be pleasantly surprised at the sophistication and ease of use.  For me, a particular benefit is the ability for this firm to communicate with you, and you with us, through a secure channel.  

For now, may I sign off and wish you all a Merry Christmas and Happy New Year.

With kind regards,

Andrew Longbon

For, and on behalf of, Longbon & Company