What’s all the fuss about: long-term investors can take a long-term view – mid-year outlook

Ask the average investor to describe the first half of 2025 and they’ll probably say ‘volatile’. Volatility is relative, where one week can feel busier than the last, or one month can see an uptick in market movements, but the first half of 2025 felt like a generational bout of extreme volatility.

But this is not necessarily bad for us. While it may have felt like being stuck in the middle of a storm, as active managers volatility can often be a good thing. It’s also worth noting that despite the volatility, most fixed income markets have produced positive returns in the first half of the year. Managing money through volatility can be stressful, but it is a good opportunity for active managers: the key is ignoring the short-term noise.

Markets in a fascinating place

In my view, the trend of long-term yields coming down is over – with a natural reaction to ask whether we are now in an environment of rising long-term yields. There is no reason that this can’t happen but the bond market is caught between inflationary pressures and fears of a tariff-driven recession, so it is a fine balance. However, it is clear that the change in the risk premium in just about all markets is now at the long end of the yield curve. In a world of record equity prices and low corporate spreads, it is an outlier. 

If you read the newspaper every day, versus how markets have reacted fairly rationally, then it all does feel slightly overblown.

When considering this, what is worth deciphering is whether markets are ignoring this fundamental reversal as well as managing to put the news cycle to one side and not be dragged into short-term volatility.

To say it another way, if we are focused on the news, we should see volatility skyrocket – which has happened over these past six months – but most risk premia have not really followed. Spread levels are broadly flat – albeit having taken a detour to get there, equity indices are positive for the year and are near all-time highs. The markets are not being consistent – which should give us opportunities.     

We are still seeing a lot of liquidity in markets, so is the fear overblown? If you read the newspaper every day, versus how markets have reacted fairly rationally, then it all does feel slightly overblown. The system is working as it should, despite all of the outside bluster.

One answer might be that the more important question is not around politics, but to what extent we are in the midst of a modern industrial revolution – driven by AI.

Will artificial intelligence drive us forward?

The world is in the middle of a climate revolution, where changing weather patterns continue to affect more and more of us. This alone has led to significant changes in investment behaviours. We are also seeing rapid demographic shifts and we are at the start of an AI revolution.

Our job is to look through and profit from the volatility whilst keeping a strong eye on the long-term drivers of risk, growth and productivity.

These are all destabilising in the short-term, leading to bouts of volatility, whether from job fears, immigration fears or a lack of growth in Western economies to support their current governmental systems.

If, and there’s always an ‘if’ with these things, AI can lead to a step-change in productivity where does that leave us? For a start, it would confirm that long-dated yields are mispriced. But it also means that the volatility we are seeing now – particularly supply side shocks – will not just be in the short term.

As long-term investors, we have to look to the future and take the long-term view. Our job is to look through and profit from the volatility whilst keeping a strong eye on the long-term drivers of risk, growth and productivity. Society will always need healthcare companies, it will always need financial services companies, IT infrastructure, energy companies. We are in a position to sit back and pick up any attractive yields currently on offer while focusing on the long term and ignoring the noise.

Still seeing buying

The demand for credit is still there, and we are seeing a lot of buying of corporate bonds. Investors are happy to take the yield, and looking across investment grade and high yield, we are not seeing a spike in company defaults, while the financial system seems robust. All of which means we are happy to take a ‘boring’ approach – doing the credit analysis and picking up bonds offering attractive coupons. This is the basis of our approach right across the credit spectrum.

We believe active management undertaken by experienced investment specialists will become of ever-increasing importance within fixed income against the backdrop of this volatility.

For professional investors only. This material is not suitable for a retail audience. Capital at risk. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.  Forward looking statements are subject to certain risks and uncertainties. Actual outcomes may be materially different from those expressed or implied.