In May the IA reported that fixed income funds attracted £931m of net inflows, with the Sterling Strategic Bond the single most popular selling sector attracting £392m of sales. At the same time £230m flowed into Sterling Corporate funds, as investors turned their back on UK equities.
However after being the winners of the last seven to eight years, Harris warns bonds look “set to become the losers” with equities set fare to outperform.
“The undercurrent is currently one of non-belief in the recovery, with continued significant bond buying and inflation trades unwinding,” says Harris.
“However, global leading indicators and broad measures of economic activity suggest that the strength in global growth in both the developed and emerging world remains strongly intact, despite not being built into consensus forecasts.”
This, adds Harris, sets the stage for a turn up in data surprises and a “good backdrop for equities to move higher”.
While not forecasting a linear back-up in yields, Harris expects a “very long and bumpy process” in which yields slowly to start to rise. He says: “Yield proxies and high quality will struggle in equity markets, with headwinds for sovereign bonds.”
“Inflationary expectations are now at levels at or below those seen before Trump’s election,” says Harris. “It appears as though we are walking through a negative shock to inflated reflationary expectations. This has been partly driven by China’s cooling policies and the weakness in the oil price, however, the US also remains extremely puzzling.”
Indeed Harris believes the market is misunderstanding the Federal Reserve’s signalling and therefore is still underestimating its interest rate policy intentions.
In this environment, which Harris describes as a “defining moment of change”, he expects value to outperform in the second half of 2017, as it typically does when profits growth picks up.
“In many markets there is room for significant improvement in value stocks and this could last for a number of years to come.”
