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Deutsche Wealth: Fixed income loses appeal

Rising interest rates and yields have made Deutsche Bank Wealth Management pessimistic about fixed income investment, according to Tuan Huynh, Singapore-based chief investment officer and head of discretionary portfolio management for Asia-Pacific.
Deutsche Bank sets high bar for Asia discretionary
Tuan Huynh, Deutsche Bank Wealth Management

“US 10-year treasuries are trading above 2.70%, and I think the markets are starting to price in not only higher growth but most likely higher inflation expectations. So we are moving closer to the fair value range,” he said at a recent media briefing in Hong Kong.

Huynh is also expecting German bund yields to go up, but not as much as US treasuries.

Yield spreads have also come down to an all-time low as a result of the quantitative easing in different markets over the past eight-to-nine years, according to Huynh.

Source: Deutsche Bank Wealth Management

“What we are saying is the kind of risk-return reward is not as favourable anymore, and obviously with the expected rising interest rates and yield environment, these can also hurt the bond market.”

Huynh expects muted returns across the fixed income space, where returns for 2018 are around 3% and below, with the exception of emerging market sovereign and corporate bonds.

Source: Deutsche Bank Wealth Management

“Fixed income is not our most preferred asset class, but we are recommending to clients emerging markets and selective high yield if they still want to invest into the fixed income space.”


Unlike fixed income, Huynh still sees value in global equity markets. However, he acknowledged that investors may not see similar returns like last year, especially with the high valuations in most markets.

“The US market is trading at around 20% premium to its historical average, and most of the other markets are in a similar case. The only market where the actual PE is trading below the historical average is Japan.”

Source: Deutsche Bank Wealth Management

However, Huynh still expects positive returns for global equities as earnings will compensate for high valuations. He also expects double-digit earnings growth for US companies this year because of the US tax reform.

“With the tax reform, part of the additional money will be used to buy back shares or increase dividends,” he said.


Source: Deutsche Bank Wealth Management

Within the global equity markets, the bank has a preference for markets that have the highest return expectation, which are Asia and Europe.


Because of the fixed income “warning signs”, the bank is exploring investment ideas in alternatives, according to Christian Nolting, Frankfurt-based global chief investment officer and global head of discretionary portfolio management.

Real estate is one such idea, Nolting said during the same media briefing. “We do think that real estate prices could further rise.”

Source: Deutsche Bank Wealth Management

However, he is cautious about the retail segment as online shopping is becoming more popular globally. “We further expect falls in prices in the retail segment, so it’s not our favourite area.”

Besides real estate, the bank is also looking at convertibles. Although convertibles are more risky than bonds because of their higher beta, their correlation to bonds is zero, according to Nolting.

Part of the Mark Allen Group.