Fidelity star warns of ‘deteriorating’ UK credit quality
Fidelity’s £3.2bn MoneyBuilder Income fund manager Ian Spreadbury has warned that bond markets are failing to recognise the UK’s deteriorating credit quality.
The fixed income veteran, whose fund has delivered a top quartile 37.2 per cent gain in the past five years, in February told Investment Adviser he was cautious on UK government bonds or ‘gilts’, as yields hit historic lows amid a global flight to ‘safe haven’ assets.
But in a client presentation this morning he has delivered an ultra-bearish outlook, saying a secondary risk of a future surge in UK inflation could be the catalyst for gilt market falls.
“I don’t think markets are fully pricing in the deteriorating credit quality of the UK and the tail risk of inflation, no matter how small,” he said. “If growth continues to slow in the UK it is pretty clear there is a high risk the UK will lose its AAA rating.”
“It might not affect gilts because of continued quantitative easing (QE), but ultimately when markets realise QE is not helping real growth they will get impatient and concerned about the potential impact of QE and inflation,” he added.
Mr Spreadbury said the Moneybuilder Income fund’s duration - or sensitivity to changes in interest rates - stood at 7.1 years compared with the benchmark level of 7.7 years.
“It is not my base case inflation will pick up in the short term, but it makes sense to run lower levels of interest rate risk,” he added.
Official estimates of the UK’s economic contraction in the second quarter were revised up slightly this morning. However, Mr Spreadbury said he was remaining wary that growth in the UK could deteriorate further.
He said the low growth environment is already impacting corporates.
“The poor macro environment is hitting credit quality and we are looking at that quite carefully from a credit selection perspective,” he said.
“Default rates are picking up and historically with growth under 1 per cent default rates tend to pick up. That is happening and I expect it to continue.”