Hoggarth says if we did see the start of a trend of outflows from equities and into fixed interest, he would be concerned investors were overestimating the safety of bonds.
“They may not be the preservers of capital that we’d usually expect in a downturn. Rising rates could hurt both equities and bonds. With an eye to preserving capital we currently prefer shorter durations bonds which have a lower sensitivity to rate rises, together with money market funds. The returns are lower, but so are the potential losses.”
Kleinwort Hambros senior market strategist Fahad Kamal suggests sentiment on bonds can shift rapidly as concerns regarding the asset class rise and fall.
He says: “Several times, we have seen moves in the market and predictions that the big bond sell off is coming, then it reverses. Do we think this is going to be one of those times where it is reversing again?
“No matter how you cut it, fixed income, all across the board from gilts to esoteric CoCos is overvalued and really unattractive especially if you think it is going to be a rising rate environment. But we hold quite a bit of fixed interest to offset the risks we hold in equities and other risk assets. That is in a nutshell. We are not favourable on the asset, but we hold it to keep our risk balanced to take a fair bit of equity. You need to have a risk absorber particularly government bonds.”
Kamal says that with the UK seeing the wrong sort of cost push rather than demand pull inflation, he still thinks, despite the shift in MPC voting patterns, that the Bank of England would rather be late than early with rate rises. Short term that would be better news for bonds.
“We have a lot of equity risk but there are not a whole lot of other places to go and anyone who tells you otherwise is lying. We recognise it is a crowded space and are doing our best to find value within the equity set. Everything is expensive. Nothing is a screaming buy. We are running a cash weighting, short duration bonds which is quasi cash. We are defensively optimistic.”
