The firm’s chief investment officer, Mark Robinson, says this shift is largely as a reaction to the change in outlook for interest rates and inflation on both sides of the Atlantic. He adds that the same macro conditions are starting to have a very different effect on equities to bonds.
Changing consensus
Commenting that stock markets still look positive, he says: “We are seeing the early signs of a shift in consensus on both the interest rate and inflation. As recently as four months ago, there was a widely held view that a small tap on the monetary brakes would be seen by mid-year but the weakening in global economic growth, exacerbated by the earthquake and tsunami in Japan, has swiftly altered this scenario.
“The timetable has shifted once again, with markets not now anticipating a rise in UK interest rates until mid 2012. A similar scenario is anticipated in the US. This is quite a sea change in sentiment and this is causing us to modify our strategy.”
He points to an expected reduction in future global inflation given, firstly, the recent drop in oil prices by 20% from its level at the end of April; secondly, China is raising interest rates to target its own inflation – 6.4% in June – both slowing economic growth; thirdly Chinese commodity imports are falling; and, finally, positive news from US farmers has helped push down the price of corn, wheat and other soft commodities.
ILG on way out
Robinson says: “These high levels of inflation have been entrenched in the investment psyche for some time now, and it has been important to position clients’ portfolios appropriately for these conditions. Our diversion into index-linked government bonds has been a successful move, and a great deal of money has now been channelled into index-linked bonds globally, pushing yields to extremely low levels.
“However, it is not only today’s inflationary conditions that we need to react to, but the ones ahead of us. We are therefore reducing our commitment to index-linked bonds in favour of the relative safety of shorter-dated conventional government bonds.”
If inflationary pressures fall later in the year, Robinson says he may even move into conventional government bonds.
