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Our views 05 July 2021

JP’s Journal: 25 years of change

5 min read

I love my football. Watching the England / Germany match on my sofa last Tuesday took me back to 1996 when I was at Wembley singing “Three Lions” and seeing Gascoigne come agonisingly close to winning the game before the inevitable penalty loss.

Some things don’t change – I see “Three Lions” is back – but markets do change. I thought it would be fun to pick my top eight changes over 25 years.

1. Inflation

The big change here is in inflation expectations. Central banks have gained more independence and have succeeded in setting global inflation expectations at pretty low levels. In 1996 the 10% UK inflation of the early 1990s was still fresh in the memory.

2. Interest rates and government bond yields

This is the biggest change in fixed income markets. In the UK, the bank rate hovered around 6% and 10-year yields were near 8%. The picture in the US was similar with official rates above 5% and 10-year yields approaching 7%. German yields were not negative but offered the princely yield of 6%. What has driven the collapse? Take your pick from disinflation, the impact of the global financial crisis, regulation, globalisation, shift in balance between capital and labour, technological developments, interventions in markets, and the emergence of a savings glut from Asia. Bottom line: I do not believe that current global rates are the new long-term normal.

3. Geopolitics

The rise of China has been a major theme in economies and markets. This has been accompanied by a retreat by the US from global leadership and the creation of a monetary union in parts of Europe. The latter has supported the creation of deeper European credit markets but has not led to a voice that could challenge the leadership of the US or China. The continuation of these trends is likely but the rise of Africa will be interesting to watch.

4. Credit markets

The Merrill Lynch sterling credit indices were launched in 1996. The market value of their Sterling Non-Gilt index at the end of 1996 was £60bn and the credit spread was 33 bps. Today we are looking at £680bn and a spread of 90 bps. Composition has changed dramatically: rather than being dominated by real estate bonds and high quality corporate and senior financial debt, the current index is much more diverse. Today we can lend our clients’ money to an array of global companies, social housing issuers, infrastructure projects, universities, securitisations and within financials we have a much greater choice of where we lend within the capital structure. I think that credit markets will remain the prime source of finance and that the breadth of opportunities will continue to increase.

5. Equities

Equity markets used to be primarily valued on Price / Earnings ratios; today this seems old fashioned with much more sophisticated models being used. However, whatever model you look at, one thing I can say is that valuations are higher. Why is this? – see “1” .

Equity is now global – we used to think in regional terms back in 1996. Globalisation and a sense that capitalism had triumphed has led to equities being viewed globally – both in terms of the rise of truly the global company and the globalisation of strategies and indices. This won’t change.

6. Information and data

There has been an explosion of low-cost information. Sources of information about companies have massively increased, how we get this information has changed (email, internet, video conferencing), how we use data to make our investment decisions, how we communicate with clients and what clients want from us – all changed greatly.

7. Growth of passive management and fee compression

Passive strategies have grown in popularity and have pulled down the cost of investment in all asset classes. As an active investor I feel there are areas where structural inefficiencies give me a competitive advantage. Certainly, not following a benchmark, taking appropriate active risk, and having a consistent philosophy has allowed our credit strategies to show better returns. Ironically, the growth of passive strategies makes the job of the active credit manager easier.

8. Responsible investment

Recent years have seen the launch of sustainable and green bonds, by both companies and government, a much greater awareness of climate risk, more information on ESG evaluation requested by our clients and generally, a recognition of the sheer scale of change required to shift economies to new sustainable structures. We have moved to reflect this – but as my colleague Martin Foden says – “if we have not been assessing ESG risk previously we have not been doing proper credit analysis. ESG risks are not new and if we are lending for 10 or even 50 years these long-term risks are central to our evaluation of risk and return. Unthinking green investment is another inefficiency we will take advantage of – to give our clients better outcomes.”

Cash, government bonds and currencies

Data last week did not disrupt markets. There was a mixed picture for US jobs: non-farm payrolls were higher than expected, but the unemployment rate rose 5.9%. Cash rates remained steady whilst sterling eased back to 1.38 against the US dollar.

10-year US treasury yields moved decisively lower on the week, taking yields to 0.25% below their 2021 year-to-date peak. Major debt markets followed this trend with UK yields moving to 0.7% and German levels hitting -0.24%. Implied inflation moved lower in most markets.

Activity in our strategies was relatively low – and we still have a bias towards short duration against benchmarks.


Status quo was maintained, with little change in either investment grade or high yield spreads. A possible supermarket bidding war may highlight the cheapness of UK assets to private equity buyers and the importance of covenant protection in credit markets.

I have highlighted some key changes: I could have mentioned online shopping, flexible working, cryptocurrencies, mobile phone usage, contactless payments etc. But some things actually have stayed the same. Gareth Southgate is still in the news and, from an investment perspective, there are still lots of credit market inefficiencies. Roll on Wednesday!

Past performance is not a reliable indicator of future results. 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. Portfolio characteristics and holdings are subject to change without notice. The views expressed are the author’s own and do not constitute investment advice.