This month:
Expert investment views:
US government bonds are compared to UK and European offerings, with the latter tipped for outperformance over Treasuries
Investors are urged to look beyond government bonds for portfolio protection, potentially to energy equities and gold
A recent tale of fund manager humility is recounted in the context of the ‘undervalued UK’ investment theme
Featuring this month’s experts:
1. US, UK and European government bonds compared
Insights from:
The US gained significant attention through 2023 thanks to its economic data outperforming expectations during that period. However, in recent months, we have witnessed a moderation in the US economic data released relative to forecasts.
The economy grew at a slower pace than initially reported in the first quarter of 2024, with GDP rising at an annualised rate of 1.3%, below previous estimates, reflecting softer consumer spending on goods. US manufacturing data surprised to the downside in May, continuing its contraction trajectory.
Nevertheless, the US consumer confidence index increased after being subdued for three consecutive months, although it reflected household concerns over persistent inflation.
The narrowing of the gap between growth in the US and Europe suggests that “US exceptionalism” may have peaked
In contrast, recent economic data from the Eurozone surpassed expectations, lending credibility to the narrative of an economic rebound in the region with manufacturing PMI in May edging higher, albeit from a low base. Similarly, the UK manufacturing sector continued its positive trend, marking its highest level since July 2022.
Eurozone economic sentiment edged higher in May adding to expectations of continued modest growth in the second quarter of 2024. Furthermore, the labour market remains extremely tight, with Eurozone unemployment dropping to 6.4%, its lowest level since 1999. The narrowing of the gap between growth in the US and Europe suggests that “US exceptionalism” may have peaked.
European and UK bonds are anticipated to outperform US bonds. Despite the higher-than-expected inflation release. Rate cuts from the European Central Bank are expected later this month.
Nefeli Neophytou
Investment Research Analyst at Arbuthnot Latham & Co.
2. Looking beyond government bonds for protection
Insights from:
The iBoxx Global Government bond index (including all maturities) has underperformed equities by over 10% so far in 2024i. This difference can be partly explained by faster global economic growth, which has supported company earnings and equities, but lowered expectations for interest rate cuts. For instance, the futures market currently anticipates that the US central bank will lower interest rates by around 0.3 percentage points, compared to the 1.5 percentage points expected at the end of 2023ii.
Another reason for higher bond yields is that geopolitical tensions are affecting foreign demand for US Treasuries at a time when US public debt is soaring
With the improving economic backdrop, the spectre of inflation continues to linger as a risk to bonds, especially because crude oil prices are rising. Another reason for higher bond yields is that geopolitical tensions are affecting foreign demand for US Treasuries at a time when US public debt is soaring. For example, given the risk of facing financial sanctions, the Chinese government has allowed its holdings of US Treasuries to drift down to a 24% share of its FX reserves — a record lowiii.
In summary, given the economic recovery amid plenty of geopolitical tensions, it probably makes sense to diversify portfolio protection to include beneficiaries from higher crude oil prices, like the energy sector. Gold too has a proven track record of offering portfolio protection during times of uncertainty and is supported by demand for bullion. Ultimately, while stocks sometimes trade down over the short term during geopolitical uncertainty, a strengthening global economy typically favours equities over government bonds.
Daniel Casali
Investment Strategist, Investment Management, at Evelyn Partners
i LSEG Datastream, Evelyn Partners
ii Bloomberg
iii LSEG Datastream, Evelyn Partners
Top Tip
Portfolio protection rests to a very large extent on diversifying your holdings properly, but investors also have to consider if they are diversifying their sources of portfolio protection sufficiently. As this month’s Investment Bulletin highlights, it can be the case that traditional stabilisers like government bonds come in for stressors themselves and the status of the strongest issuers is prone to change. You need to diversify your diversifiers, so to speak.
It is obvious that investment portfolios need to be fortified against a multitude of risks for the months ahead; this is shaping up to be a most dramatic year. Why not let us arrange some no-obligation discussions with leading wealth managers so you can ensure your investments are in the best possible shape for whatever lies ahead?
Lee Goggin
Co-Founder
3. Buying the ‘undervalued’ UK
Insights from:
It is rare to find an active fund manager who possesses the integrity to publicly apologise for poor performance. Nick Train, founder of Lindsell Train and manager of the Finsbury Growth and Income trust, recently ‘acknowledged and apologised’ publicly for the Trust’s poor performance. There are two ways to look at this apology.
Firstly, Nick Train demonstrated commendable integrity by publicly apologising – all active fund managers experience periods of underperformance, but rarely do they apologise to their shareholders so openly. Many fund managers who could learn from such humility; integrity and trust should be held front and centre when selecting a fund or investment manager. Active fund management, by its very nature, will sometimes put a fund at odds with market consensus, and therein lies the investor’s opportunity.
Technology exposure, which has acted as a drag on recent performance, has increased to 55%; whilst his underlying conviction that the UK is undervalued remains resolute
Investors could align themselves with ‘honest Nick’ through the Finsbury Growth and Income Trust, investing in resilient businesses with established brands such as Unilever. Technology exposure, which has acted as a drag on recent performance, has increased to 55%; whilst his underlying conviction that the UK is undervalued remains resolute.
However, a better way for investors to align themselves with management might be through the Lindsell Train Investment Trust, which is trading at a 17.9% discount to NAV and yielding 6.2%. The Investment Trust, established in 2000 to help fund the original business, owns the largest minority stake in Lindsell Train alongside its two founders. Nick Train also has a 6.7% interest in the Investment Trust.
Jim Meysey-Thompson
Investment Director at Tyndall Investment Management
Important information
The investment strategy and financial planning explanations of this piece are for informational purposes only, may represent only one view, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment and financial planning decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.
