LT Views Winter-2025-SINGLE-build08 - Flipbook - Page 5
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Bonds will offer more opportunities for active investors
over the next few years as the asset class reacts to a
changing economic and political environment. In doing
so, bonds will provide investors with the potential for
enhanced diversification and this supports our positive
view of the future role of the 60/40 or balanced portfolio
– i.e. 60% invested in equities and 40% in bonds.
A key driver of this outlook is the fragmentation of
globalisation and the move towards a more multi-polar
world, in which supply chains are shortened and there
is more protectionism.
We believe this will lead to inflation being higher
– although not at elevated levels – than we have
become accustomed to over the last decade. This is
likely to be reinforced by the policies of the second
Trump presidency, including if his threatened tariffs are
implemented against China and Europe. Interest rate
reductions have already been slower than expected.
With this backdrop, tighter monetary policy and lower
liquidity could cause higher market volatility.
Another consequence is that economic cycles across
the major economies are likely to be less in sync than
we have come to expect. This will lead to increased
diversity in actions by central banks, including interest
rates no longer moving in near unison, whether up or
down. This will in turn make it more beneficial to actively
manage exposure to bonds.
What will this mean for the outlook for balanced
portfolios? They have been effective traditionally
because growth is primarily delivered through equities
over the long term and the bond exposure helps to
smooth any volatility of returns through its diversification
away from equities and in its payment of income.
Historically, equities and bonds are negatively correlated.
Intuitively, this makes a lot of sense. For example, what
is bad for sovereign bonds – good economic data –
tends to be good for equities, including through the
positive impact on earnings.
Past performance is not a guide to future returns
Bonds are currently providing
a real return above pervading
inflation rates, meaning investors
in bonds are paid to wait
while they receive a relatively
attractive level of income
A notable exception to this long-term trend of negative
correlation was 2022, which was only the fourth calendar
year since 1928 in which US bonds and equities fell in
tandem. Several factors combined to lead to this unusual
positive correlation. Inflation soared following the Russian
invasion of Ukraine and the steep rise in energy prices.
Central banks moved to tackle the much higher rate
of inflation by raising interest rates in a way we had
not seen since the 1970s. This led to a general fall in
equities, which was followed in turn by bonds.
The fact that sovereign yields were close to or at alltime lows (and indeed negative in many instances)
meant the outsized yield adjustment required was more
uncomfortable. Indeed, government bonds suffered
their worst return in 2022 in 20 years (with 2021 the
second worst).
But now we expect to see equities and bonds
increasingly move back towards their historic levels of
negative correlation. Bonds are currently providing a
real return above pervading inflation rates, meaning
investors in bonds are paid to wait while they receive a
relatively attractive level of income. This is a traditional
benefit of bonds investing that had been forgotten
since the Global Financial Crisis. We also believe that
following the repricing of bonds in recent years, fixed
income investing will have a greater positive benefit for
portfolio construction.
All of these developments are serving to reiterate why
we believe in the positive role that the 60/40 portfolio
can play for investors in the future, especially when
actively managed with a long-term outlook.
LIONTRUST VIEWS – WINTER
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