Talk about getting your hopes up. What was six or seven rate cuts in 2024 has become one or two - maybe - as inflation persists and the first dark hints of a wage-price spiral become etched on the horizon.
It's not just Joe Biden and Rishi Sunak who are re-examining their plans as the prospect of dramatic rate cuts fades.
Uncertainty around sticky inflation and reduced rate cuts may in part explain why Asset Allocator’s most recent sentiment survey has seen the mood surrounding fixed income, especially government bonds, dampen in the three months since we last checked.
Back in December, 70 per cent of the DFMs we asked were optimistic on bonds overall, with 66 per cent feeling bullish on govvies. Now, feelings have fallen to 50 per cent and 45 per cent positive respectively, as the prospect of central bank easing has become increasingly distant.
We recently touched base with James Flintoft, head of investment solutions at AJ Bell, about his sale of iShares Global Aggregate Bond ETF and purchase of iShares USD Treasury Bond 20+ Yr ETF instead.
He informed Asset Allocator the team made the move into Treasuries because they were keen to take less credit risk, particularly outside the US.
“This is a bit contrarian by the looks of it, as I’m increasingly seeing global managers shift towards Europe based on expectations they will cut rates sooner, which is already in the price to some extent,” he said.
AJ Bell’s decision goes somewhat against the grain of our other allocators, who have recently had their interest piqued by UK gilts.
Last month we covered the shift away from T-Bills and into gilts, with DFMs now holding just 2.5 per cent of their overall portfolios in US Treasuries, compared to their gilt holdings of almost 5 per cent.
Liontrust is one allocator that’s going beyond both the UK and US in search of more interesting finds. They told us they’re maintaining that monetary policies may be less co-ordinated than they have been historically, so they want to have greater diversity within their fixed income allocation.
This could see them dipping into emerging market debt in the not-too-distant future.
Meanwhile, despite the current inflation-interest rate tug of war, the team at 7IM still sees fixed income as an attractive investment. They told us they remain positive given the attractive yields on offer for investors to hold on, as well as the potential capital gain if rates were to come down.
On the other side of the coin, the decreasing prospects of a 'hard landing' scenario has seen the mood surrounding equities boost over Q1 2024, which we covered in the newsletter last week.
Overall 56 per cent of the allocators we polled were positive about equities as a whole, compared to just 33 per cent being positive at the turn of the year.
Whether it’s bonds, equities, or both, that get through 2024 unscathed is a matter we’ll be returning to over the year.
