Bonds, budgets and bubbles

Are we in a stock market bubble? And if we are, what should investors do about it?

Historically, it's always been hard to know how far a bull market can go. And value has proven to be a very weak read on which to lean, because value can go up and up. The nightmare for any value manager is Japan in 1989 when the price earnings ratio went to 65 times. It had never previously been over 25 until that cycle.

But bond market moves this week have made investors nervous that the frothy parts of the market could be the first to go in panicked selloff. The forecast for average inflation over the next decade, derived from bond prices, has risen to nearly 2.2%, the highest level since 2014, partly reflecting soaring commodity prices.

These nerves have turned the global government bond market into the weakest start of the year since 2015, as inflation erodes the value of interest payments on bonds and reduces the value of debt.
The scale of the selloff prompted Australia’s central bank to launch a surprise bond buying operation to try and staunch the bleeding, helping yields there come off early peaks.

If rates rise sooner than expected Tito’s budget forecasts might have be tossed out the window.

To review the week that was Michael Avery was joined by Warwick Lucas Chief Investment Officer at Galileo Asset Managers, & Raymond Parsons, professor in the School of Business and Governance at North West University