Time to fix? Why this could be the moment bond investors have been waiting for?

Financial Advisory

24 November 2022

Advisory DistributorsBondsFinancial AdvisoryFixed IncomeInflationMarket TrendsRecession

Expert: Adrian Hull, Aegon Asset Management Facilitator: Richard Clarke, Hannam & Partners


  1. Fixed income has been a fantastic asset class for over 30 years prior to the aberration year of 2022
  2. The fixed income market fell by 20% in 2022 (to 31st October) and to put this into perspective, the previous biggest fall was 5% in 1994
  3. It seems clear we will be in a recession in 2023, but it is hard to know how long and deep it will be
  4. The recession of 2023 is more consumer than corporate earnings oriented (i.e., few corporate defaults expected) so it will feel more like the early 1990s than 2001-2 or 2008
  5. Expectations are that interest rates will plateau at 4.5-5%. The days of long term 0.5% interest rates and sub 2% inflation ore over


Economic backdrop, inflation, and interest rates for 2022 and 2023

2022 has been a bad year, the Central Banks did not forecast the high inflation (driven initially by supply not meeting demand e.g., microchips for new cars) or the high interest rates we are now starting to experience. The supply and demand issues were driving up energy costs before the Ukrainian war, which has clearly accelerated gas and electricity inflation.

It is surprising that, aside from the US Federal Reserve, the G7 has not been more aggressive at increasing interest rates (especially in the Eurozone). This has resulted in a 2022 strong US dollar, which has hampered growth of other markets. It is worth noting that the FTSE 100 index has performed better than most other equity markets, as so many of the FTSE 100 component companies have significant US$ revenues.

The expectation is that the UK inflation rate has peaked and should come down to a long term 2-4%, unless labour shortages continue, with wage inflation driving overall inflation above 4%.

Increasing tax rates for productive high earnings does not stimulate growth. Truss had a point about the need to stimulate growth in the economy, but the execution was clearly terrible.

One of the issues to address is the low UK savings level which has fallen from 20% in Q4 2020 to 3% as people have had to cut back on, or even to eat into savings, to cope with high inflation.


Key takeaways:

  • All investment asset classes (equities, real estate, credit, fixed income) are ‘red’ YTD 2022, so it is impossible to correlate portfolios. However, if you think inflation will come down then assets look cheap with fixed income and equities looking like an attractive current buying opportunity
  • There was a discussion about the effectiveness of UK asset-focused investing, with clever strategies given the increasingly global insignificance of the UK in the global economy. There was a strong view that an MSCI global index tracker would comfortably outperform any UK investments
  • Due to the decrease of fixed income return in 2022, lifestyle investment strategies have been a nightmare and the deficient performance of such strategies may risk future customer compliant and FOS redress
  • If clients are invested in a 60/40 portfolio, they should stick with it as they have already taken a 20% drop in 2022 and confidence should rise in 2023 for fixed income, given where interest rates are now and likely to do in 2023
  • As an asset class, cryptocurrency has repeated the experience of the Tulip bulb and other historical asset class valuation collapses, albeit with a dynamic speed courtesy of celebrity endorsements in a social media age