One of the key issues preoccupying Rayner’s thoughts at the moment is the problem of the bond market. How do investors protect against rising yields in the near-term when they have more defensively positioned portfolios?
And since fixed income makes up a significant portion of many diversified portfolios, this problem affects a wide swathe of investors, he said.
Though Rayner believes “the bond market is in a difficult place” because of the high probability of rate hikes in western developed markets, the US in particular, he thinks yields might not get as out of control as people fear.
“The consensus is that we will not be that far into the rate rising before it noticeably affects the economy,” he said. “So, the bond market may get away with it, in terms of how far rate rises go. In the meantime, low-duration bonds, like global floating rate and index-linked products, are investors’ friends.”
Rayner also thinks that in developed markets like the UK and the US, investors should play up the cyclicality and value stock themes.
“Schroders and River and Mercantile have a bias toward value in a number of their funds,” Rayner offered.
“Equally, there are some more pragmatic funds out there that have weathered the rotation of markets, like some from the Old Mutual Global Investors’ range, and a number of passive funds, actually. These types of funds can act as core as you build alpha bias elsewhere.”
Ultimately, we don’t know whether these macro scenarios will play out, Rayner said, because we don’t know whether fundamentals will win out over sentiment in 2017.
“Last year, the market was driven by sentiment rather than fundamentals. This year, we don’t know which one will dominate. But if the market continues to be sentiment-led, we will see greater volatility.”
