During the current financial year, the market experienced a sharp dip in January and early February, a healthy recovery over several months and a mini wobble after the EU referendum, he noted.
“You have been sitting on good returns almost wherever you have been invested in 2016,” Iggo stated. “Interest rates have fallen, credit spreads have narrowed, equity markets have performed OK and commodity prices have recovered. For bonds in particular, when we look at level of yields today it is hard to think you can get the same level of returns going forward unless yields go very, very negative,” which Iggo says “is mathematically impossible.”
One of the primary obstacles standing in the way of obtaining greater returns going forward is the monetary policy regime that currently reigns over developed economies. And Iggo suspects the market will continue to be dominated by the central banks for a good time to come.
“Most of the world is in a monetary policy regime that is still focused on trying to raise inflation, generate economic growth and trying to figure out new ways of adding monetary stimulus to the system. Given the extreme setting of monetary policy, it would be foolhardy to think that is going to shift any time soon unless there is a big surprise on the upside for inflation growth, but we don’t really see that,” he said.
That is why, as an investor living under the current economic regime, your options are limited, Iggo emphasised. “You either go with the central banks or you don’t, and at the moment, the path of least resistance is to go with central banks. As a result, we expect spreads and yields to remain relatively low.”
The relevant question now becomes “where are you going to get yield in a world where all the eligible assets the banks can buy are getting very expensive?”
For the time being, Iggo suggests that high yield and emerging market debt are areas that will allow investors to boost returns and diversify away from the central bank dominated parts of the fixed income market.
However, he admits that there is no escaping the fact that “it is difficult to get income. That is unquestionably the story today and part of the dark art of quantitative easing. The central banks want to make people spend more and save less. That goes against what society wants. Investors need to save for their future because pensions have underperformed, people are living longer and you are not getting big increases in wages. Sadly, the two things aren’t really compatible.”
