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00:00This program is brought to you by ADFX.
00:20In light of the recent fluctuations in the bond market and the waves of losses in the past two years,
00:30a fundamental question arises. Are bonds still playing a stable role in the investment capital?
00:36Historically, bonds have provided income and benefits.
00:40Did they also leave this role?
00:42With the sharp increase in interest rates,
00:44did the rules of the game change?
00:46What are the signs that emerged in 2022 when we saw bonds fluctuating with other risky stocks and assets?
00:54Is it just a coincidence or a sign of a fundamental change in the financial markets?
00:59The most important question is how can we adapt to this change?
01:02What are the effective strategies to manage the investment capital at times like these?
01:08I am happy to welcome Zaina Rizk, the co-founder of Capital Partners.
01:16Zaina, welcome.
01:17Thank you.
01:18Usually, the topic of fixed income is a boring one for some investors, especially beginners.
01:25But it is a very interesting topic.
01:28Of course.
01:29Zaina, we started by looking at fixed income or bonds today in the financial capitals.
01:36We asked our viewers if these bonds are important in the financial capitals.
01:42The answers were very different.
01:45Some see them as always necessary at 21%.
01:50It is not necessary.
01:51Also, the percentage has increased by 24%.
01:53Perhaps they were harmed in 2022 when bonds were strongly refunded.
01:59And some see them as important depending on the economic situation.
02:03First of all, are bonds important in the financial capitals?
02:11Of course.
02:12Bonds are important in the capitals, but their percentage changes depending on the objectives.
02:18Why?
02:19How old is the investor?
02:21What is the goal of his capital?
02:23What is the goal of it?
02:26Does he have a deadline to pay in the future or not?
02:31And the percentage also changes depending on where we are in the economic cycle.
02:36For example, the economic situation now puts bonds in a better position than equities,
02:43although we can see from the beginning of the year that there has been a big increase in the bond market.
02:48But I think that we will not continue with this trend.
02:56Here we will discuss a very important topic, which is the relationship today.
02:59You pointed out the increase in bonds and equities.
03:02It is supposed to be a reverse relationship, or at least not related to maintaining or reducing the fluctuations in the financial capitals.
03:11But if we look historically and go back to 1926,
03:18and we look at the performance of the investment capitals,
03:23a capital that has 100% bonds and 0% equities,
03:27a capital that has 60% bonds and 40% equities,
03:31or 60% bonds and 40% bonds,
03:34we notice that during that period,
03:38of course, this is according to the US market,
03:41the US bonds and equities of US companies,
03:44we notice that the investment in bonds alone was about 10.3% as an equivalent,
03:54although the fluctuations were also much higher.
03:58The fluctuations were only in the bonds,
04:04we saw a 43% decline,
04:07while if the bonds were more, the fluctuations were less.
04:12I always look at this chart and say,
04:15if my grandfather, or my grandfather's father, invested in a capital in 1926 with 100% bonds and 100$,
04:21the capital would have reached a million dollars today,
04:24but unfortunately, he bought land and oil in it.
04:27Of course, there is always a tendency to change in the performance of bonds and equities in some cases.
04:35But today, according to the age of the investor,
04:42how is it supposed to be, and what kind of bonds?
04:46The composition that we studied in the textbook, which is 60% and 40%,
04:50is now becoming more and more,
04:54because as I said, their returns were very correlated,
04:58which is not supposed to be,
05:00because before this high correlation,
05:02there was the exceptional period that followed after 2008,
05:06when the Federal Reserve started to raise interest rates in 2022.
05:12During this period, we had a huge amount of money in the markets,
05:15which led to an increase of 2% at the same time,
05:18and the interest rates in America were 0%.
05:21The only way for bonds to return was an increase in the price,
05:26which is not supposed to be,
05:28because it is a fixed income,
05:30it is the coupon that we get every 6 months, once a year, or quarterly.
05:35Why is their volatility less?
05:38Because of what is called mean reverting,
05:40which means that the bond is issued at a certain price,
05:43and then during the lifetime of the bond,
05:46the prices may rise and fall,
05:49but if there is no default,
05:52at the end of life, or at the maturity,
05:54the interest rates will go up again.
05:57100% plus the coupon that we got.
06:00Correct.
06:01However, those who had long-term bonds,
06:07if we look at this chart,
06:10we notice that in the 80s,
06:13until about the year 2020-2021,
06:17we had a rising market,
06:20which lasted for more than 30 years.
06:23The return on these investments was about 6.3%,
06:28a real return.
06:31It was close to the returns of stocks, sometimes.
06:35Until the year 2022 came,
06:38and we witnessed this decline,
06:41and I think it was the worst year for bonds.
06:45Can this happen again?
06:49So what happened,
06:51before COVID-19,
06:55the Federal Reserve was raising the interest rates.
06:59We started with a proper economic cycle,
07:02then we had COVID-19,
07:04and the central banks around the world
07:07started to invest in low interest rates,
07:10and we went back to zero.
07:12There was a very high rate of inflation,
07:15and the Federal Reserve said that this inflation
07:17could be fought in an easy way,
07:19which turned out to be wrong.
07:21We were at a point where the rate of inflation was very high,
07:25and they had to raise the interest rates in a very strong way
07:29to fight this inflation.
07:31That's why there was such a high rate of inflation in one year,
07:34and that's not what led to the negative return.
07:37Do we expect this to happen again next year?
07:40Of course not.
07:42If the Federal Reserve didn't lower the interest rates this year,
07:46we don't think the interest rates will increase again.
07:49So when the interest rates go up,
07:52this has a negative effect on the stock market,
07:55and vice versa.
07:57Before, if you bought an investment grade,
08:01which is the stock of the highest economic capacity,
08:06it used to give you roughly 2%.
08:09Now it's giving you 5.5% or 6%.
08:11This shows that even if the interest rates didn't go down,
08:14even if the stock price didn't go up,
08:16even with this, you still have, as they say,
08:18your pay-to-weight,
08:20the carry you're taking.
08:22When the Federal Reserve starts to lower the interest rates,
08:26this also has a positive effect on the stock market.
08:29So 6% is still a tempting return for the stock market.
08:33We haven't seen this for many years.
08:36But the most important question today,
08:38when we look at the stock market,
08:40it's not just about the income,
08:44but also to diversify the stock market.
08:47But if we look at the past few years,
08:50we've seen a discrepancy in this performance.
08:53At times, we've seen close relations,
08:56at times, it was the opposite.
08:58But when we look at the last three years,
09:01we see that the relationship between the stocks and the bonds
09:04is very close.
09:06It goes up together and goes down together.
09:08This is what we've seen so far.
09:11Why has this relationship become like this,
09:13and will it change, in your opinion?
09:15The relationship has become like this
09:17because of the main reason,
09:19which is the increase in liquidity in the markets.
09:22As we said, the interest rates were at zero,
09:25the only way,
09:27and there was a lot of money supply from the central banks,
09:30which is not called quantitative easing.
09:33This money supply led to everything going up at the same time.
09:37Why is it still like this?
09:39Because in the bonds market,
09:41there are people who say,
09:43you are paid to wait,
09:45because you can either invest,
09:47or put it as a deposit in the bank.
09:50The deposit in the bank is now giving 5%,
09:52but after six months or a year,
09:54it will decrease by 5%.
09:56So if you go into the markets now,
09:58and wait, it will give you roughly 6%.
10:00At the same time,
10:02the economy is still very high,
10:04and inflation has become lower than it used to be,
10:07which is positive for the stocks,
10:09which is leading to an increase for both at the same time.
10:12But will this continue? I don't think so.
10:14When the Federal Reserve starts to lower the interest rates,
10:17which will be the result of,
10:19most probably, a decline in the economic growth,
10:22this has a negative effect on the stock market,
10:25and a positive effect on the stock market.
10:27So the relationship is not as normal as it used to be.
10:30We always try to provide advice
10:32to the investors,
10:34especially those who are new to the world of investment.
10:37Even when I was in the Finance Department,
10:39I always advised the investors
10:41to be a part of the Federal Reserve with the bonds.
10:43If they don't like it at the beginning of their career,
10:45it's not a problem.
10:47Today, if you are in your early 20s,
10:49and you are starting a new job,
10:51you just need to focus on the stocks.
10:53But of course,
10:55we have reached the age of retirement,
10:57which I think is a very important thing.
11:00And even if we are far from retirement,
11:02we need to raise money to buy a house,
11:04to pay the rent,
11:06to buy an apartment.
11:08It is also necessary
11:10to be a part of the Federal Reserve
11:12with the bonds,
11:14so that we have liquidity,
11:16and at the same time,
11:18we are not at risk of this capital.
11:20Do you have any advice for the investors?
11:22The advice I just gave is very correct.
11:24The bonds are necessary,
11:26and diversification is necessary.
11:29Percentages differ according to age
11:31and according to all objectives.
11:33And also,
11:35investors know the stocks better.
11:37For example,
11:39if you tell them to invest in Microsoft,
11:41they know it.
11:43But if you tell them to invest in a Microsoft maturity bond
11:45in the age of 25,
11:47it becomes more complicated.
11:49But as you said,
11:51they need to invest in the bonds,
11:53because not only can it give returns,
11:55but it can also increase its prices.
11:57So, the correlation of the bonds and stocks
11:59will decrease,
12:01and it will be positive for both in the portfolio.
12:03Thank you, Ziana Rizk,
12:05the company and the co-chairman
12:07for the stable income of Capital Partners.
12:09Thank you very much for this interview.
12:11Thank you.
12:13And watch us to send any suggestions
12:15or questions.
12:17You can send them to us
12:19on the website chiffred.almal
12:21at cnbcaribbea.com
12:23See you next week in a new episode.
12:25Thanks for watching.