Waverton Investment Management sees value in gilts for the first time in “many years”, while it has gone underweight equities in its latest global outlook.
The gilt total return index was up 0.8% in July despite dropping 2.7% in the year so far.
Waverton has exposure to both long duration gilts and US treasuries through its £832.5m Sterling Bond fund.
The firm said: “We continue to see bonds as attractive. If we look at current nominal bond yields on both sides of the Atlantic and compare them to current market expectations for inflation over the next decade, there are positive real yields on offer in gilts and treasuries.
“Given our cyclical view, we continue to have more exposure to government bonds than normal in our fixed income portfolios as we have a lower allocation to credit than we have ever done, back to 2009.”
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Waverton analysts also pinpointed short-dated sterling credit as attractive, with yields of 5-6% for investment grade bonds maturing within the next 18 months.
They added: “We would also highlight that for the first time since 2001, the three-month treasury bill, a proxy for cash, yields more than the forward earnings yield on the S&P 500.
“It remains the case that our suspicion is that both the earnings yield and the corporate bond yield will increase if we do finally get signs of a slowdown in the second half of 2023.
“The one thing that would derail the current market narrative would be an increase in the rate of inflation. We are watching developments in the energy markets closely as a significant increase in oil and petrol prices would dampen discretionary demand but would alarm policymakers who are hoping they are nearly done with rate hikes.”
Underweight equities
In its global outlook for August, the firm said the decision to be underweight equities was a macro call “predicated on the view that a slowing of demand is likely” in the coming months as the lagged impact of higher interest rates filters through.
“We expect to see market leadership change in the second half of the year and widen from the unusually narrow drivers evident in the first half.”
Analysts also noted that the US stock market has been acting in a way consistent with confidence that the US economy will avoid a recession. They added that, since the end of May, S&P 500 cyclicals were up 16% compared to 9% for growth stocks and 5% for defensive shares.
The wealth manager said valuations outside of the leading Nasdaq firms look “undemanding” in the rest of the world.
Meanwhile, it remains neutral on both cash and alternatives.
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