September 2023

Market Commentary

(3 minute read)

Fixed Income Emerges from the Doldrums

For many years investors of all risk profiles have been steered towards traditionally riskier assets in the form of the equity market because interest rates and returns offered in the bond market were close to zero. The sharp and significant increase in inflation because of rising prices caused by the war in Ukraine, the disruption of supply chains due to Covid and, most importantly, years of very low interest rates, has meant that the Bank of England has responded by increasing interest rates. The pace of rate rises has been significant as the chart below demonstrates.

The consequence of global central bank actions is that bond markets had their worst performance in history in 2022, with a total return of -13% for the global bond index. Cautious investors, who would conventionally have a higher weighting to bonds in their portfolios, were therefore affected the most and the 60/40 equity/bond mix provided little protection with such poor returns not seen since the 1930s. Montgomery Associates had minimal exposure to the bond markets during this period.

The recent launch by NS&I, the government guaranteed National Savings & Investments, of a one-year fixed bond yielding 6.2% has received much attention and reflects how much interest rates have risen since the end 2021. The 6.2% rate for NS&I is above the 5.25% level for both the Bank Base Rate and the 2-year UK government gilt and therefore a generous offer. The question is whether in a fast-moving market environment locking into an interest rate for a year is the right strategy. For the first time in years, we are in the process of increasing the weighting to fixed income within our asset allocation to recognise our view that bonds are back to fair value if you think that we have seen the worst regarding the inflation shock and close to the peak for the interest rate cycle.

Whatever one’s view, it is safe to say that bonds are now more competitive relative to other asset classes than they have been for 15 years. However, we continue to believe that for a balanced portfolio equities provide the best chance of beating inflation longer term.

Peter Geikie-Cobb | Head of Investment Research
Montgomery Associates

7th September 2023