Our views

Credit positioning: seeking long-term value and security


Martin Foden, Head of Credit Research

 

19 September 2016

Following the UK’s vote to leave the European Union, we have amended our outlook and growth forecasts across asset classes to take account of the likely impact of an extended period of political and economic uncertainty upon growth and activity, both in the UK and in other regions.

We expect the effect of the Brexit result to be focussed on the UK and the eurozone, and we do not anticipate that it will lead to a systemic global financial event. UK inflation now looks set to rise a little above target during 2017. We expect the positive effect of lower sterling on import costs to be tempered by a marked slowdown in growth. We anticipate further policy easing from the Bank of England in the third quarter, and we think that the government will change its fiscal strategy.  We do not think it is likely that former targets for deficit reduction will be maintained, and we think that austerity policies will be watered down in order to encourage, rather than hamper, growth.

UK yields have fallen significantly following the referendum, and remain at extremely low levels. Yields on German Bunds have fallen into negative territory, and other core government bond yields have also declined.  While we think the extreme drop in UK government bond yields was an overreaction to the event, we expect that yields will continue to stay low, as statements from the Bank of England have indicated a clear support for further monetary policy easing. We expect this to be enacted through a cut in interest rates, along with some form of credit and/ or quantitative easing programmes.

Whichever way short-term market volatility plays out, what remains clear is that credit markets, with their over-reliance on credit ratings and fixation with benchmarks, will provide mispriced opportunities that an active investor with the right approach can continue to exploit.

 


The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.