In addition to normalized interest rates, history is on the side of bonds, according to Julius Baer, which is calling 2023 a «glorious year» for investing in the asset class.

Julius Baer is positive on fixed income in 2023, advising investors to move up the credit ladder to take advantage of rising yields from bonds with higher quality.

In addition to the end of the ultra-low rate regime, the bank notes that historical trends point to a high likelihood of positive returns for the asset class after two years of losses. Dating back to the 18th century, the bond market has never generated negative returns for more than two consecutive years, according to data from Compound Advisors.

«It's going to be a glorious year for bond investing,» said Julius Baer Asia chief investment officer Bhaskar Laxminarayan in a briefing attended by finews.asia. «The straight and simple way of investing in bonds has become real again.»

IG Preferred

Within the asset class, Julius Baer is focusing on longer duration and higher quality, preferring investment grade over high yield bonds. In emerging markets, higher quality bonds are also expected to benefit from an economic recovery fuelled by China’s reopening.

As for investors who prefer a more conservative approach, the bank is advising to consider short duration structured products, credit-linked notes and money market instruments.

Long-Term Equities

On equities, the bank is positive, preferring defensive quality first followed by cyclicals, once again pointing to historical trends as a driver.

Since 1950, the S&P 500 posted more than 5 percent monthly returns for two consecutive months just 13 times and in all of the instances, significant outperformance followed in the next 12 months. But the bank is positive even for the longer term with the Dow Jones registering a 7-year rally following a 3-year consolidation every decade since 1900.

«There is no better time to actually buy into equities from a long-term perspective,» Laxminarayan said, though he noted that investors will likely have to stomach volatility during this period.

Alternatives

In light of volatility in public markets, Julius Bear is also advising investors to consider hedge funds to take advantage of the turbulence and private markets for attractive and complementary returns.  

China: Ideology to Economy

And on China’s reopening, Julius Baer admits that the recent changes were unexpected and that the country is rapidly moving its focus from ideology to the economy. 

Supporting evidence includes replacements amongst top diplomats that are no longer «wolf warriors» – a term to describe those engaged in confrontational and combative diplomacy. State-owned media coverage has also shifted with a lower frequency of keywords like «common prosperity» or «dual circulation» in favor of terms like «reopening» or «free trade».

«Nobody knows why it happened but if we have to guess, I think we just got to a pain point where the Communist Party realized the economy was on the brink,» said Julius Baer head of research Asia Mark Matthews on the reopening, citing speculation that local governments had run out of money. 

«China has changed in a way that was almost unimaginable from even a month ago. And if I had to rate these changes on a scale of 1 to 10, I'd say it’s a 15.»