Uncertainty here to stay?
Interest rates peaking, technology stocks rising and inflation expectations declining produced precisely the market conditions that led to a long rally in government bonds, but James Klempster, deputy head of multi-asset at Liontrust, is among those sceptical that investors are in for a return to the market conditions that prevailed before 2022.
He says: “We do not expect the past decade to provide the blueprint for the coming one. Inflation is high and stickier than ‘transitory’ implied, but there are signs that we are through the worst. The period between the global financial crisis and Covid-19 of unusually low inflation is unlikely to return any time soon.
"In a multi-polar world, with greater geopolitical divides than we have seen for many decades, the one-size-fits-all approach of long US dollar, US Treasury and the US stock market that was so profitable post-global financial crisis is unlikely to have everything its own way from here. Nuance will return.
"Whether that is between equity styles or regions where higher interest rates will provide pitfalls to laissez-faire capital allocations, performance differentials will likely return.
"Central banks in both the global financial crisis and Covid acted as a unified force, but are now focusing on domestic needs that are, by definition, unique, meaning that fixed income markets will no longer move in lock step."
Coombs' view is “the professional classes, because they can work from home at least some of the time, are better off, and that’s why the economy is holding up so well.
"Right now there is so much uncertainty, we aren’t really overweight to very much, but if we are overweight to anything it is to cyclicals right now.
"So we own long-duration bonds and we own cyclical assets. But the way bond yields are moving right now, how quickly they are moving, we could have changed that by next week. We also hold some gold as we always do.
"In terms of what would make us buy more US government debt, we would want yields above 4 per cent.”
In terms of his equity exposure, Coombs says: “If GDP growth does continue to pick up, then you want to own European equities rather than those of the US.”
Carrell is focused on emerging market debt and convertible bonds for his fixed interest exposure, but feels he needs “more confidence” in the economic outlook before he would increase exposure to non-US equities.
Beaumont says he has been surprised at how strongly both equities and high-yield bonds have performed this year to date, but continues to be cautious on both asset classes.
