… and other fixed income still provides diversification

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Australia and New Zealand are in a “privileged position”, Robert Tipp says, because we still have the luxury of one per cent interest rates. The chief investment strategist at PGIM explains why it is not all bad news.

PGIM is the global fixed income business of the US Prudential Financial Inc. Tipp, in Australia last week to speak with clients and prospects, said that in the majority of capital markets around the world, for the foreseeable future, people would be paying to store their money.

The two questions for investors, he said, were: why had interest rates dropped so close to zero, and, why had some gone below zero? The answers to both tended to revolve around demographics and the general halt in the rise of leverage. “We have shifted from a growing debt world to a static debt world,” he said.

Tipp is responsible for PGIM’s interest rate outlook and overall positioning, the firm accounting for more than US$800 billion overall. The good news, he says, is that if the world goes into recession, as is being spoken about, the only thing that will appreciate are long-term bond prices.

Tipp says that after the financial crisis there was perceived to be a great need to regulate the financial system because of all the leverage. China was the biggest driver of world growth but now its workforce was shrinking and growth slowing.

Stocks in relation to bonds were relatively cheap, he said, but both stocks and bonds would continue to outperform cash. This would remain the norm.

“Negative interest rates are unnatural. When interest rates are zero you can have your money in the bank for safety,” he says. “And that’s the way it should be.” He says that deflation is a natural condition whereas inflation is not natural. Tradable goods quality adjusted, for instance, which is most things except property assets, tend to decline in price over time. “That’s the way it has probably always been.”

If an investor, in a low-rate environment such as now, assumes that rates will probably go back up, he or she will probably underperform. People who go to cash in this environment will not have the incremental income they need.

PGIM has various fixed income strategies which look for opportunities in the market segment, such as those which target cash plus 300bps or even cash plus 500bps.

– G.B.

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