"So I get that people look at the inflation rate today and the bond yield on a government bond today and see its negative in real terms, especially if you think inflation is going to average the current 10 per cent level for the duration of the time you own the bond.
"But if you think inflation will be lower, then there is no doubt bonds are a more attractive investment now than they were last year, because the nominal yields are higher than they were last year.
"The best way to think about government bonds is as a form of insurance against equities doing badly. And the yield you get is like the insurance premium.”
But he is less keen on the investment case for high yield bonds right now, having bought into the asset class in 2022, as he feels prices have risen too much.
Coop says that while markets are starting to price in a scenario whereby inflation and interest rates have peaked, he is more cautious, taking the view that the re-opening of China could very possibly lead to an increase in inflation on the demand side.
He adds: "Changes in the Ukraine/Russia conflict could have a major impact on energy and commodity prices, so for that reason, I don’t think now is the time to be adding risk to portfolios.”
Mood music
Rupert Thompson, chief economist at Kingswood, is also cautious, but thinks there could be a more firm recovery later on in 2023.
He says there has been a change in the mood music from policy makers in 2023, with indications they feel a brighter outlook for the global economy will happen, principally as a result of the re-opening of the Chinese economy.
He says the renewed optimism is also a function of the mild winter keeping gas prices lower in Europe than might otherwise have been the case, something which he says has boosted business confidence in the economic bloc.
According to Thompson: “We still believe that markets could well retreat again over coming months before staging a more firmly based recovery in the spring or summer.
"There are two main reasons for our caution: the first is the market’s confidence that the Fed will be cutting rates in the second half of the year despite its protestations to the contrary; the second is the continuing downside risk to corporate earnings which markets seem to be ignoring.”
Data from consultancy firm ARC indicates that discretionary fund managers have generally been moving away from cautious portfolios-they account for just one per cent of the capital deployed in the portfolios covered by ARC, while the typical balanced portfolio, the most widely owned by those investors ARC work with, rose 3.5 per cent in January.
