JP’s Journal: A changing environment

One of the biggest changes I have seen in my career at RLAM is the composition of our teams. In the 1980s, when I joined, my colleagues were similar to me: male, university educated (one degree), monolingual. My slight differentiation was being from the North – although I was not alone.

Today our fixed income make-up is different and better for it. The Sterling Credit team is led by Paola Binns, the Global Credit team is headed by Azhar Hussain, and colleagues come from a much wider talent pool – often with more than one degree. Our language skills reflect the diversity of backgrounds, although unfortunately I have not mastered any other language. 

RLAM has recently appointed Siobhan Clarke into the senior position of Chief Investment Operating Officer. She brings a wealth of experience gained at other leading asset managers and at our last ‘Town Hall’ – a great forum for letting colleagues hear and interact with leaders – she talked about her interests outside work, mentioning both running and yoga. Siobhan has offered to teach “all comers” an introduction to yoga – the focus being on mental as well as physical well-being. It’s great to see Siobhan taking the initiative here.

On the subject of health, I was struck by the latest life expectancy figures which show that females have an extra three years over males and that this gap has been growing recently. Covid appears to be the main culprit, with life expectancy declining for males but broadly unchanged for females. It is not clear why males have been more impacted, but research may well show lifestyle differences have made men more susceptible.

Government bonds and cash

It was another volatile week in bond markets. Short rates bore the brunt of the move – with two- year yields hitting 1.5% and 1.4% in the US and UK respectively. Interestingly, 10-year yields saw a divergence, with a late rally in the US letting rates settle just above their previous week’s closing level. In contrast UK 10-year yields moved higher, ending above 1.5% for the first time since Q4 2018. Euro area rates continued to rise, seeing German 10-year yields at 0.3%. Implied inflation firmed a bit over the week, reflecting the stronger than expected US inflation data – now showing Consumer Price Index (CPI) at 7.5%. Food, energy, vehicles, and air fares all contributed to the upward pressure with housing bucking the trend. Reflecting these cost pressures, real terms average hourly earnings remained in negative territory at 1.7%.

UK Q4 GDP growth came in a touch weaker than expected at 1.0%. That left overall GDP growth up 7.5% in 2021 after -9.4% in 2020. The monthly pattern of growth has been variable, and December ended the year on a sour note with GDP falling 0.2%. Delving into the Q4 figures shows that consumer spending and investment growth was stronger than expected – although some of this was driven by increased GP visits and the vaccination programme. It is likely that Omicron will lead to a subdued January, though the Purchasing Managers’ Index (PMI) composite business survey showed no deterioration and is consistent with a relatively solid rate of growth in activity. As in the US, real pay growth in the UK is weak and likely to get worse. With fiscal policy tightening and higher mortgage rates on the cards real disposable income will come under renewed pressure through 2022.

Credit

Credit markets had a poor start to last week with the sterling investment grade spread hitting a 15-month high at 115bps. Issuance was subdued although we did see new bonds from Associated British Foods and Severn Trent. Towards the end of the week sentiment changed and spreads came in, to end below 110bps. High yield saw renewed widening, although spreads still remain below the November 2021 levels. Geopolitical tensions remain elevated although some Ukrainian issuers took advantage of weakness to buy back bonds in the markets whilst in China more support for the stressed real estate companies emerged.

It is a strange time for bond markets. The old rulebook is changing as QE (quantitative easing) gives way to QT (quantitative tightening) and rates start to go up. The short ends of markets have been battered and there is no immediate let up to inflationary pressures – as oil hits $95 a barrel. And yet I find myself buying government bonds and increasing duration. To me, short maturities are pricing in a speed and intensity of rate increases that I don’t see happening against a real squeeze on incomes. Time will tell. 

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.