2014 Bond Outlook
NEW YORK ( MainStreet) Increasing the percentage of bonds in their portfolio can help investors balance their risk and avoid the volatility from the stock market, experts say.
Bonds will still add value to a portfolio, said Jack McIntyre, a portfolio manager and senior research analyst at Brandywine Global, a global bond investor with about $48 billion in assets under management.
"I think there are too many bond market bears out there right now," he said. "Everyone hates bonds. When was the last time someone said something constructive on bonds? It was probably me."
Tapering by the Federal Reserve has already been priced into the market, so even if interest rates rise, bonds remain an attractive investment, said Krishna Memani, chief investment officer at OppenheimerFunds, which has $232 billion in assets under management.
"Bonds fit into a portfolio for multiple reasons," he said. "Bonds provide some level of income and some level of protection. Bonds still have a very clear role in a portfolio. The underlying outlook is quite good."
While yields for bonds are not expected to rise a lot in 2014, investors should still add municipal bonds, higher quality corporate bonds, high yield bonds and emerging market debt as good sources of diversification to their portfolios, Memani said.
Bonds will help anchor and balance a portfolio as well as provide income even if interest rates rise.
"Bonds will do much better than equities in an environment where people question the economic outlook because they are less volatile," he said. "You need some balance in your portfolio. Bonds are the only things that provide you that balance."
The best opportunities in fixed income in 2014 will be in emerging market debt if an investor's time horizon is longer than one quarter and can "stomach some volatility," said McIntyre.
Synchronized growth in the developed world in countries such as the U.S., Europe, Japan and China does not occur very often and the effect will trickle down from trade to the developing economies, he said. Since this growth has not been factored or priced into emerging debt or currencies, the returns will be attractive - Brazilian bonds are yielding 13% while the Indian rupee has an implied yield of approximately 9%, South African bonds are yielding north of 9% and even Turkish bonds have a yield of 10%.
"Even when tapering begins, global monetary policy will still be biased toward being accommodative, so the liquidity faucet won't be totally shut off," said McIntyre. "Historically, you earn the highest returns in emerging market debt by investing in them when there is a crisis. The recent price action constitutes a crisis. There are a host of elections in emerging market countries next year and politicians are the same everywhere. They want to get their economies expanding going into elections."