Investors should continue to invest in fixed income products, say Gartmore fund managers, because despite recnt price swings in the bond market and increasing interest in equities, it has been on the back of historically good returns and portfolios need to maintain balance.
Alix Stewart, manager of the Gartmore Corporate Bond fund and Richard Hodges senior investment manger responsible for European fixed income mandates, both take the view that a broad range of factors need to be taken into account when looking ahead at what may happen in the market.
A common factor to both UK and European focused funds is the forecast decrease in supply of corporate bonds.
Companies have been cutting debt and improving balance sheets in the past year as quarterly profits have continued to improve beyond analysts’ expectations.
Additionally, in Europe a big wave of euro-denominated bonds will start maturing through this year and next as the region marks the fifth anniversary of the adoption of the euro.
That debt is unlikely to be re-issued by companies now in a position to pay investors from improved balance sheets, Hodges says.
Restricted supply would dictate continued strong prices, yet demand too will play its part, Stewart and Hodges both add.
It is no secret institutions, especially those in charge of pension funds, are already following a trend towards fixed income in order better to match assets and liabilities.
What is also forecast is an increasing move towards such investments also by retail investors.
Over the past 13 years BBB rated bonds have outperformed the FTSE All Share by a factor of almost 2x, according to figures quoted by Gartmore.
The problem has been that retail investors have typically seen bonds as “boring”, yet are increasingly aware that equities come with risk levels that are unsuitable for their investment objectives.
Inflation fears are undoubtedly causing volatility at present, yet Stewart and Hodges both believe these fears are being overplayed.
UK interest rates are already being priced in and monetary authorities are unlikely to spring any surprises on a market, while inflation still remains at low levels.
The inflation outlook for the eurozone is also benign, while there are additional quirks of the market that mean it should be regarded separately from the UK and US ones, Hodges says.
There is no great institutional demand for long term bonds for private sector pensions funding purposes.
The market will instead be impacted by insurers are looking to close a “funding gap” caused by selling products with guaranteed returns at a time when inflation and interest rates were higher than currently.
Perhaps the biggest reason to look at fixed income here, Stewart suggests, is her forecast that UK equities will provide negative returns this year, unless the stock market can mount another sustainable rally between now and the year end.
However, with rising profits already factored into equities prices, it is hard to see where this additional impetus to share prices would come from, she adds.IFAonline
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