Fixed Income  

Riddell: ‘Massive disinflationary pressure’ emerging

Riddell: ‘Massive disinflationary pressure’ emerging

Fixed income managers moving short duration have again been been “wrongfooted” by disinflationary pressures, according to AllianzGI’s Mike Riddell.

The manager said he was staying “broadly neutral” duration in his £906m Gilt Yield and £71m Sterling Total Return vehicles because global disinflationary pressures had made UK monetary tightening appear less likely.

Mr Riddell, who joined AllianzGI last October after 12 years at M&G, warned a Chinese slowdown and tumbling commodity prices had put paid to the prospect of imminent “rampant inflation”.

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“We have so many people in the world expecting rampant inflation, but we are seeing massive disinflationary pressure,” he said.

“So many people have been so wrong about bonds. Everyone thought growth would bounce back and inflation would pick up. But growth has disappointed. Inflation has come in under target since 2012. Markets have been pricing in a 33 per cent chance of cuts in interest rates [in the UK].”

Earlier this month the Bank of England predicted inflation would stay under 1 per cent throughout 2016, not returning to its 2 per cent target until 2018. It cited factors such as a depressed oil price, muted global price growth and “subdued domestic cost growth”.

Mr Riddell noted that, in this context, it made little sense to go short duration. His gilt fund has a duration of “just over 10 years”, while the total return portfolio has a duration of about seven years.

“In the UK, growth is slowing,” Mr Riddell said. “Normally at the end to an economic cycle you see inflation pick up. There is a distortion by the commodity prices but inflation is still about 1 per cent off. To have an interest rate hike, we have got to see inflation of 4 per cent or higher.

“I have been broadly neutral on duration. I think a lot of people have been wrongfooted in the past few months. I’m not short duration because I do believe that growth and inflation are on a downward trajectory. [My long duration position is not] just because of valuations.”

At the end of December 2015, the Gilt Yield fund had a 45.6 per cent weighting to bonds with a maturity of 10 to 30 years. Some 45 per cent of the Sterling Total Return portfolio was weighted to holdings with a maturity of at least 10 years.

In the total return fund, Mr Riddell is also taking a cautious approach to credit as liquidity concerns intensify.

The manager, who had half his portfolio allocated to investment grade credit at the end of December, said: “We have big concerns on credit markets. I was trying to sell £600,000 of a £1.5bn sterling bond issue from the last few years. You would expect that to be very liquid but [initially] not one buyer offered to buy those bonds.

“This is investment grade European credit, BBB-rated. This is an example of the horrific bond liquidity.”

AllianzGI buys fixed income specialist RGP