While markets were panicking about the US debt ceiling last month, they temporarily forgot about interest rates and inflation (phew..!). Now that this issue has been resolved market focus has moved back onto the macro-economic environment.
The 2023 Spring Budget produced some of the biggest, most wide-ranging changes to pensions legislation since the “Pension Freedom” reforms of 2014. The statement was a surprise to say the least.
The grass isn’t always greener on the other side. Gardening and investing do have something in common!
Inflation in the US and Europe has been dropping at an increasing pace while in the UK inflation is still in double digits.
In times of high inflation, one might expect index-linked bonds (ILBs) to provide the insurance their name implies and protect returns. Instead, in 2022 ILBs were one of the worst performing asset classes, leaving many confused about their performance. As measured by the FTSE UK Actuaries series, an investment in an All Stocks inflation linked bond tracker at the start of 2022 will have dropped in value by 33.60% at the end of the year. Even worse, an investment in an Over 25 years maturity tracker would have lost over half of its value!
So why did ILBs perform so badly, and where are they headed from here?
Investors’ optimism has started to wane as inflation expectations have once again changed – as an example, the latest US jobs report shows that hiring activity was three times stronger than the market expected. Big business leaders have also commented, highlighting that while the labour market is tight, they are not finding hiring as hard as expected.