Inflationary pressure is likely to recede in the new year, boosting economic growth and the returns delivered by equities, at the expense of bonds, according to Nathan Sweeney, deputy chief investment officer for multi-asset at Marlborough.
Sweeney works on the £400m product range and says: “We think the global reopening will produce a solid economic recovery, even with each new variant, supply chains are adapting better, and that should lead to less price pressure.
"For a while now markets have been driven by central bank action, and when monetary policy was loose, that helped valuations, so investors focused on growth equities, but when monetary policy tightens, the focus moves to the valuations of equities, and that is where we think it is going now, we have a definite bias towards value equities.”
In an environment where growth and inflation are high, he says, he would expect bonds to underperform, so he has been selling fixed income assets to fund increased exposure to the equity markets which tend to perform best when value is the prevailing investment style, such as the UK and Japan.
Of the bond exposure he does have, he says: “It is perfectly normal to expect higher inflation in the year ahead, and with that in mind, the bond exposure we do have, we are keeping short duration.”
Bonds which are short duration are those which will mature and return the capital to investors in the near future. As a result of this, the price of those bonds should hold up better in a rising inflation environment, because the capital is being returned soon. Its purchasing power won’t be diminished to the same extent by rising prices as would the bonds, which don’t return the capital until further into future, when its value in purchasing terms will have diminished more."