News & analysis BONDS BOMB TO TWO-DECADE LOW
As expectations for an economic upturn rise, UK bonds are enduring their worst quarter in 20 years.
UK government bonds have recorded their worst quarter in at least two decades, according to a Bloomberg Barclays index. Global bond markets have had a torrid time in the opening three months of 2021, but the sell-off in gilts has been extreme, which has seen yields plummet 6.5% on a total return basis – putting it on track for the worst performance on records going back to 2000.
Demand for bonds has weakened since January as investors seem to have decided that negative rates are not on the cards for the UK, and with Brexit resolved, these removed support for gilts from many investors looking for a safeguard against uncertainty. Now an unprecedented convergence of events and economic recovery packages have generated serious concerns that infla- tion will eat into fixed-income returns.
And this parlous outlook could get worse. Analysts are expect- ing a further period of poor performance for bonds, as the so- called ‘reflation trade’ – where growth and inflation accelerate – led by US bonds, continues.
“With current yields so low, and prices across the board quite high, the chance of significant further gains is unlikely. In fact, we think it is more likely we could see capital losses,” said Joseph Hill, investment analyst at Hargreaves Lansdowne. It seems many investors expect reflation to look different in the EU, with the economic outlook considerably more uncer- tain. Many countries, including France, Italy and Germany, have recently gone back into lockdown. As a result, debt issued by Germany, France, Italy and Spain has done better, with loss- es ranging from 0.5% to 3%.
The 10-year gilt yield increased 0.56% in the first quarter to 0.76% and pushed the gap between yields on UK bonds and bunds to the widest since the autumn of 2019 – at about 1.1%. A key part of the picture is the Bank of England (BoE) upgrad- ing its growth forecasts. A somewhat relaxed Andrew Bailey, BoE governor, said recently that the rise in gilt yields is consist- ent with the “change in the economic outlook”. This seemed to present an assured narrative that the BoE will not need to cut its main policy rate below zero, instead adjust- ing the focus to when will be the time to raise rates from his- toric lows – if growth leads to stronger inflation. This picture is in stark contrast to last year, when the debt of several countries rose as central banks around the world flooded the market with unparalleled stimulus packages at the height of the pandemic.
INVESTORS TO INCREASE REAL ESTATE EXPOSURE
Real estate appeals to investors’ risk and return objectives in the current economic climate.
Almost three quarters of institutional investors – 72% –want to increase their real estate exposure in the next five years, accord- ing to a survey. Breaking this down, a total of 16% intend to expand their prop- erty portfolios by more than 10% over the next five years, while 56% target 10% growth. At the same time, 28% expect to keep their weighting in real estate constant, with no investor intending to quit the asset class.
This highlights some appealing factors of the asset class: the growing attraction of real estate in the current economic envi- ronment of low interest rates and fixed income yields, but also that such assets can offer institutional investors a range of opportunities that meet several risk and return objectives. The survey also shows that during the pandemic, real estate proved to be a stable investment, with 56% of investors report- ing no adjustment to their real estate portfolios.
8 | portfolio institutional | May 2021 | issue 103
The trend towards broader diversification is reflected in how investors plan to adjust their portfolios over the next five years. About every second respondent plans to grow their infrastruc- ture exposure and 42% want to invest in new asset classes, while 43% will diversify their portfolios further across different real estate segments, investment strategies (12%) or interna- tional markets (12%).
In addition, the survey revealed that faced with growing regu- latory requirements and an increasing importance of risk reporting, 79% of investors see digital services as an important differentiator for future.
real estate investment managers in the
As a result, 97% expect regulatory requirements for reporting to increase over the next five years, with 92% believing risk reporting will become more comprehensive. The growing requirements were cited as being higher expecta- tions for reporting by segments (40%), market benchmarking (42%), performance (48%) and investment reporting (60%). Furthermore, and unsurprisingly, a significant majority are preparing for increased ESG reporting at a portfolio and indi- vidual property level – 87% and 77% respectively. As a result, 73% plan to increase ESG-related figures and indi- cators used for their portfolio analyses and reporting.
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56
