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Monthly Monitor - April 2022
However, bond yields are still running significantly below inflation rates, meaning there is considerable scope for them to rise further as the year progresses, if central bankers are serious about reining in inflation.
The most obvious implication of rising bond yields is falling bond prices and losses across bond portfolios have been quite stark, with the Bloomberg aggregate bond fund index falling 9.5% this year as of 19 April.
However, there are further implications for other asset classes. Numerous asset classes have seen their valuations rise due to low bond yields. Low bond yields translate into a low discount rate for valuing assets, which leads to higher valuations.
We believe there is a considerable risk that this group of stocks will de-rate significantly in the face of higher bond yields.
With the average free cash flow yield of the group below the bond yield, investors will have to ask themselves if the fundamentals of the companies are strong enough to support the hefty valuations. We think the strength of the fundamentals of many of these companies is dubious. We are not surprised to see the average stock in this group down 10% this year.
We take comfort from the fact we do not own any of these equities across our portfolios. Not many can make this claim today.
Source: Bloomberg, 20 April 2022
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