So far this year the same scenario has not been borne out but the final quarter could see a reversion to the norm of the past two years.
The surprise of 2011 was the return on gilt funds at 16% when the word on the street was to avoid them like the plague. From an investor’s point of view gilt fund have returned upwards of 11% in the past 12 months though year-to-date this figure is closer to 3%.
The fixed income ‘surprise’ this year has turned towards high yield, whose indices are up by an equivalent amount (16.8% at the last look) when for most of the year the investment grade end of corporate bonds has been widely tipped as the place to be.
The surprise has not been the asset class itself as fixed income over the past three or four years has been a sensible asset allocation call, but rather which part of the asset class to be in.
In the medium to long term, the whole asset allocation mix is likely to remain unchanged as (in Europe at least) the same macro cycle is bound to stay the same – individuals, companies and governments all want to delever is likely to continue; inflation, interest rates and growth will all remain at 2%; global growth will trigger a stimulus in Europe not the other way around.
From now into 2013, from a fixed income perspective investment grade may overtake high yield while gilts are likely to remain out of favour unless inflation rears its ugly head.
However, these views are based on fundamentals and, as we have all witnessed, performance is driven by politicians and sentiment (art) not fundamentals (science).
Last August we had the US downgrade that contributed to the S&P falling by 10% in the matter of a few days; by contrast, this August we had Mario Draghi delivering his “We will do whatever it takes…” speech which seems to have quietened down the markets.
But next month we have the usual monthly ECB meeting, the Greek debt review, Dutch elections and German constitutional courts ruling on the bailout; by the year end we will have an election in the US and an election – sort of…certainly a change of leadership – in China, the two largest global economic powers.
These events are more likely to negatively affect sentiment than positively affect fundamentals so we are in for a rocky final four months of the year.
