Mark Dunley-Owen at Bermuda-headquartered Orbis Investments discusses why he believes bonds are attractive today, and why he has a preference for US bonds over the UK and France.
Despite concerns about rising yields, Mark Dunley-Owen, portfolio
manager for the multi-asset strategies at Orbis
Investments, has been increasing his exposure to bonds.
He believes that US bonds are attractive, as well as those in
Norway, Australia and Brazil.
“Rising yields are often seen as a warning sign, yet the
ultra-low rates of recent years could have been the exception
rather than the norm,” Dunley-Owen said at a media event in
London. “Higher yields can also reflect stronger growth, raising
questions about what they are really signaling, the opportunities
and risks they present for bond investors, and whether the
prevailing gloom is justified.”
In response to a lot of reports that have been particularly
negative about bond yields over recent months as they have been
getting higher. Dunley-Owen said this was due to a coming fiscal
crisis in developed markets. “There are certainly times when
rising bond yields indicate stress and there are countries where
you expect that to be true like France and possibly the UK. But
the US is not one of those countries,” he continued. “The US is
the biggest bond market in the world. When I look at the US today
and when I look at the rising bond yields, I think it’s very
helpful. My interpretation of bond yields is that in a
functioning, diversified capitalist economy like the US, it
works.”
“The US tracks GDP growth. The higher the GDP growth is, the
higher the bond yields are. What has surprised me over the last
three to five years is how strong the US economy is. In an
environment where the economy is growing, there is rising demand
for capital and the return on capital is higher than it was five
years ago,” he said. “The price of capital is going to go up.
When I look at the US today, I think the 5 per cent yield on a
10-year bond indicates a strong underlying economy and as a
lender, that is what I want.
“I want to lend to as strong a borrower as possible. I am not
saying the US is being perfectly managed. There are a lot of
things I don’t like about what they are doing but the underlying
security I have when I own a US bond is that it’s stronger than
it was five years ago. The return is high today.
“In 2021/22, the US tenure was 1.5 per cent. There was a view it
would last forever and inflation would be low forever and
monetary policy had changed. Today I can get 5 per cent on a US
tenure so the return has got better. The risk is also better.
“The US economy has survived a series of shocks since 2020 that
could have derailed the economy. I am more confident on risk
versus returns than I was 5 years ago. We are still underweight
in bonds. In our multi-asset funds, we have an underweight
position but it is slowly creeping up and the value we see in
bonds is much more attractive today,” he said.
On UK gilts, Dunley-Owen said that the UK is not falling apart.
“Revenue is growing, GDP is growing but it is not growing as
strongly as it could as the government is focusing on
redistribution rather than growth. It is taxing the wealthy and
redistributing it in the form of social packages,” he explained.
“Growth won’t be as strong. Margins will get worse. The UK is
underinvested in industrial assets in the last few years so it
has fallen behind compared to the US and China. Oil and gas
assets are also heavily taxed,” he continued. “The UK does have a
strong education, legal and financial center but it is not
as strong as 10 years ago. It doesn’t help putting increased tax
on private education or that firms are listing in other
jurisdictions.”
Overall, Dunley-Owen believes that the UK is slowly getting worse
over time. “UK gilts deliver yields of 5 per cent, the same as
the US, but there is no reason to lend to a lower credit country.
There’s a lot I love about the UK but on a 20 to 30-year view,
unless something changes, it does look challenging,” he said.
Dunley-Owen thinks the UK crisis is happening too
slowly: “France’s crisis is at least speeding up so there’s
hope at least some changes will be made. In some ways, you need
things to get worse for the changes to be made for it to get
better. Growth needs to be put first.”
Although it has its challenges and it is also taxing the rich,
Dunley-Owen likes Norway as its balance sheet is rock solid. In
bonds, he likes Australia and he owns some Australian bonds.
“There are also the highest returns on sovereign bonds in Brazil
today with 15 per cent yields. It is not low risk. They keep
inflation under control at 5 per cent and it should stay
controlled,” he said.
Guinness
Global Investors is also positive about the outlook for bonds
and recently emphasized the benefits of US bonds. See
here.