Bond investors face the prospect of "years in the doldrums" and are completely unprepared for it, according to Julius Baer Investments.
The firm says the asset class has provided strong returns for investors for years but claims that, in times of rising inflation, they “generally respond negatively”.
It says investors should look to replace bonds with assets which offer inflation protection, such as Treasury Inflation Indexed Securities (TIPS), and real assets like real estate and commodities.
In addition, Julius Baer says the risk of a global collapse seems to have been averted but warns the credit crunch “could still unleash further aftershocks”.
Christian Gattiker-Ericsson, head of research at Julius Baer Investment Products, says: “After a long favourable period, bond investors now face the prospect of years in the doldrums. It is clear, however, that investors are not prepared for this.
“Investors should be looking to replace bonds with other assets. In times of rising inflation, financial assets like bonds and equities generally respond negatively. In such an environment, real assets offer a good alternative.
“Their prices tend to adjust much more quickly to inflation and move in line with the overall price level, providing a good hedge against the loss of purchasing power.”
Gattiker-Ericsson says the global economy is “running out of sync, with the USA at the bottom of the trough” but argues equity markets will have “firmed up” by the end of the year.
“Despite the difficult economic environment, companies are a lot less vulnerable than in previous cycles,” he says.
“Nevertheless, though the risk of a global collapse seems to have been averted, the credit crunch could still unleash further aftershocks.
“Some buying opportunities should present themselves before the market starts moving upwards more steadily.”
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