The vice chairman and former chief executive of Jupiter Fund Management has said the UK economy seems to be sending a clear signal that government fiscal stimulus - rather than central bank monetary policy - should now do the heavy lifting to galvanise the economy.
Mr Bonham Carter said bond markets have reacted according to these expectations, with prices tumbling and yields rising on the expectation that this fiscal stimulus will lead to greater inflation.
This, he said, could be the “beginning of the end” in the bond market rally, adding: “It could well be that the low in bond market yields has been reached and we see more range-bound trading for bond prices in 2017.”
It could well be that the low in bond market yields has been reached and we see more range-bound trading for bond prices in 2017.Edward Bonham CarterDonald Trump’s win in last month’s US election also caused a sharp sell-off in the bond market.
Mr Bonham Carter also said the expectation that inflation will increase is likely to influence investment outcomes next year.
He said: “Since the end of the global financial crisis, asset prices overall have done better than most people would have expected, with valuations at the top of end of their historical ranges and stocks being viewed as cheap relative to bonds.”
The former Jupiter chief said the return of inflation should benefit sectors such as banks, which will earn more as central banks start to lift interest rates to keep a lid on rising prices, but also the metals, mining and energy sectors as a pick-up in economic growth boosts demand for their products.
“To some extent, what we are likely to see is a continuation of the reversal of the ‘growth trade’, where investors for many years have preferred to buy shares in companies that are growing faster than their overall markets and plough profits back into their businesses to expand them.”
He said investors might instead favour so-called ‘value’ stocks, where the current share price may not fully reflect the real value of the company.
“Investors may now need to adapt to a new political reality that is only just starting to take shape, and as it does, we should expect a period of heightened volatility for the markets.”
Meanwhile, Mr Bonham Carter said investor sentiment remains both nervous and cautious, particularly in Europe where the appetite for risk assets has dropped.
There has also been a fall in the number of companies looking to go public, which Jupiter’s vice chairman said is a further sign of nerves.
“That said, investor reaction appears measured rather than panicky and that is an encouraging sign heading into 2017.”
Jaime Arguello, chief investment officer at multi-manager investment company Architas, also said politics have created a rocky outlook for investment in 2017.
He said yield curves are likely to shift upwards next year, pulled up by the US curve or central bank policy, in the case of the European Central Bank and Bank of Japan.
With inflation expectations climbing, he said there has been buying interest in US inflation-linked bonds.
However, Mr Arguello warned these are often so long-dated that the duration risk is particularly elevated, and should therefore be hedged.
He said duration will remain the “key driver” of government bond markets, adding: “We would prefer active fund managers in the credit markets as they can respond more nimbly to widening or narrowing spreads.”
katherine.denham@ft.com
