“We made 16% [on our Asian fixed income portfolio] last year, but this year we'll be happy if we make 6% – there's no chance of repeating last year's return.”
So said Asaf Berman, Singapore-based partner at Swiss family office Nutrimenta in a frank assessment of the regional bond market outlook. He was equally candid in his views on the potential for a major US stock reversal in an interview with AsianInvestor last week.
Despite his admission that fixed income returns will be harder to come by in 2017, the firm is raising exposure to certain high-yield and emerging-market credit. “We are focusing on assets where we're sure that in almost in any circumstances the debt can be recycled or repaid,” he told AsianInvestor, without giving further details.
Berman's comments come amid concerns that EM corporate debt could be set for a slump this year following returns of 9.7% for dollar bonds last year, as measured by the JP Morgan CEMBI Broad Diversified index, on the back of expected rise in US interest rates and an even stronger American currency.
“The main challenge for emerging markets is the strong dollar, as it makes it harder to recycle debt or to get adequate profitability for assets denominated in US dollars,” noted Berman, who stepped down as Singapore chief executive at Nutrimenta in December but remains a partner. He was succeeded by Bennett Lim, who manages the Asian fixed income book and retains those responsibilities.
While the office is still buying bonds, the family office – like many investors – is shortening duration in its debt book. “Once rising interest rates became inevitable and will continue to creep up, we cannot go long duration,” said Berman. “And we will remain relatively short until things stabilise, which is two to three years down the road.”
The firm – which started life as a single-family office for Switzerland’s Jaglom family before transitioning to a multi-family operation in 1972 – invests 90% directly into bonds and makes very little use of funds for the asset class, said Berman. It does not invest in government bonds.
US stocks “at ridiculous levels”
Meanwhile, Berman is wary of global equities, notably the US stock market.
Nutrimenta had become bullish again on equity and fixed income in the second half of last year and quickly ramped up risk, he noted. “Leaving aside politics or whether we like or don't like [US president Donald] Trump's tweets, we understand the market drivers.”
Trump's plans to cut taxes and boost infrastructure spending to drive growth have pushed the American equity market to record levels.
Despite stuttering last week, “US stocks are way beyond where they should be”, Berman argued, especially given that their values have also been boosted by the dollar's rise against other currencies. “They are at ridiculous levels and are not pricing in any risk,” he added.
“There's a disconnect from reality [in terms of share prices]," noted Berman, “and a high tide of liquidity and risk typically covers a lot of problems.
“If I had to lay out how the future will look, for what it's worth, I think US stocks will continue to go up, then there will be a big correction, perhaps due to a backfiring on Trump's campaign promises,” he said. “Then there will be a big sell-off – though I don't know if will be in six weeks, three months or one-and-a-half years.”