• Home
  • Sustainable Investment Week
    • ESG
    • Sustainable Investment
    • Sustainable Investing
  • Equities
    • UK
    • Global
    • Europe
    • US
    • Asia
    • Emerging markets
    • Specialist
  • Bonds
  • Multi-asset
  • Funds
    • Unit trusts/OEICs
    • Investment Trusts
    • VCTs/EIS
    • Platforms
    • ETFs
    • Pensions
  • Regulation
  • Diversity
  • People moves
  • Events
  • Financial library
  • Industry blogs
  • Digital Edition
  • Newsletters
  • Sign in
    • logged-in-corporate-menuYou are currently accessing Investment Week via your Enterprise account.

      If you already have an account please use the link below to sign in.

      If you have any problems with your access or would like to request an individual access account please contact our customer service team.

      Phone: +44 (0) 1858 438800

      Email: [email protected]

      • Sign in
     
      • Account details
      • Newsletters
      • Contact support
      • Sign out
     
  • Follow us
    • Twitter
    • LinkedIn
    • Newsletters
    • Facebook
    • YouTube
    • Instagram
  • Register
  • Events
    • Upcoming events
      event logo
      Funds to Watch Conference - March

      The Funds to Watch series from Investment Week allows sponsors to show-case up and coming or evolving funds and managers to some of the most influential fund selectors in the UK.

      • Date: 09 Mar 2021
      • ONLINE, ONLINE
      event logo
      Professional Adviser Working Lunches 2021

      A series of invitation only "meet the manager" virtual lunches to discuss how a multi-asset strategy can benefit your clients and your business.

      • Date: 10 Mar 2021
      • ONLINE, ONLINE
      event logo
      Professional Adviser Awards 2021

      Professional Adviser is once more issuing the call for adviser businesses from across the UK to showcase their knowledge, skills and commitment to client care by entering our 2021 Awards.

      • Date: 11 Mar 2021
      • ONLINE, ONLINE
      event logo
      Professional Adviser Multi-Asset Masterclass 2021

      Delivered online over two half-day sessions, the Multi-Asset Masterclass will look to provide a case for multi-asset investing as well as an outlook for the sector over the year ahead.

      • Date: 17 Mar 2021
      • ONLINE, ONLINE
      View all events
      Follow our events

      Sign up to receive email alerts about our events

      Sign up

  • White papers
    • Fidelity logo whitebackground1200 630px 1 120x194
      The ETF Evolution

      In this exclusive magazine exploring the evolution of quality and income ETF strategies, King reveals that each ETF follows an investment strategy developed by the group's in-house research team that leverages fundamental active insights to inform the factor definitions and applies portfolio construction principles to mitigate the unintended biases.

      Download
      7ded04ac5957a69da8d1df41c8f21a0c33988d8f 1 120x194
      A bet on the UK bounce back

      David Cumming, Aviva Investors' chief investment officer for equities, last year witnessed turbulent times for UK equities but he remains positive about the market in which he has a personal as well as a professional stake.

      Download
      Find white papers
      Search by title or subject area
      View all white papers
  • Industry blogs
  • Digital Edition
Investment Week
Investment Week
Sponsored by BMO
  • Home
  • Sustainable Investment Week
  • Equities
  • Bonds
  • Multi-asset
  • Funds
  • Regulation
  • Diversity
  • People moves
  • logged-in-corporate-menuYou are currently accessing Investment Week via your Enterprise account.

    If you already have an account please use the link below to sign in.

    If you have any problems with your access or would like to request an individual access account please contact our customer service team.

    Phone: +44 (0) 1858 438800

    Email: [email protected]

    • Sign in
 
    • Account details
    • Newsletters
    • Contact support
    • Sign out
 
  • Trending
  • IW 1 Mar issue
  • Past IW issues
  • Budget 2021
  • Aviva profits fall
  • Consistent 50
  • ESG Awards
  • Bonds

A Midsummer Night's Illusion on bonds

Andrew Harmstone of Morgan Stanley IM
Andrew Harmstone of Morgan Stanley IM
  • Andrew Harmstone
  • 22 August 2017
  • Tweet  
  • Facebook  
  • LinkedIn  
  • Share on Whatsapp
  • Send to  
0 Comments

From May to the end of June, many investors appeared to have fallen under a spell, writes Andrew Harmstone, portfolio manager for the global multi-asset team at Morgan Stanley Investment Management.

Reminiscent of Titania, who - in Shakespeare's A Midsummer Night's Dream - fell in love with Bottom, a comic character with the head of an ass, investors fell in love with the bond market. This caused yields to fall and triggered a sell-off in the equity market.

Near the end of June, the spell broke, sending yields sharply higher as investors realised that the bond market was not quite as attractive as they had thought.

Related articles

  • Consistent 50: Seilern Europa Fund debuts at number one
  • A recipe for disaster? 'Coiled spring' bond market falls 'just the beginning', experts warn
  • Mark Mobius: Why 'the US may regret' hostility towards Chinese tech
  • Eurizon SLJ Capital offers exposure to Renminbi bond market and local currency EMD with double fund launch
  • An intensive scare for the industry: Admitting to painful truths about racial inequality a big step towards healing it

When to run for the exit on bonds

Considering that we are in a low-volatility environment, underpinned by a broad-based global recovery, we view investors' brief love affair with bonds as a temporary delirium, triggered by a softening in inflation and concerns that it would not pick up again.

However in June, the European Central Bank's stated support for higher interest rates suggested confidence in the health of the eurozone economy, easing investors' concerns over inflation. This led them to sell bonds.

The Fed also appears to be undeterred by weaker than expected US inflation, reflected in its continued resolve to increase rates, given evidence of strong economic foundations.

Wage growth

One of the illusions in June seems to have been investors' expectation that wage rates would go up immediately as economic recovery took hold.

Reinforced by low oil prices, the lack of wage growth has helped keep inflation down, and many investors have been under the misapprehension that this is a sign of economic malaise. This, in turn, made bonds appear attractive. 

But it was an illusion. Business fixed investment has been low for many years, indicating that companies have been holding back on upgrading their old machinery and systems, underscored by the average age of capital stock: in the US, it is currently 21.75 years, whereas in the mid-1980s it was below 19 years.

Although it may initially make sense to hire more workers when demand ticks up, eventually increased hiring puts upward pressure on wages.

Management can only afford to pay these higher wages after employee productivity increases, which incentivises investment in more efficient equipment.

In other words, capital investment improves productivity, which drives wage growth.

Only once investments in fixed assets are fully operational, will we see productivity rise and, following that, wages. How long does it take for this initial investment to filter through to wages?

The evidence points to about five quarters. The correlation between investment and wage growth is 24% with no time lag, whereas with a five-quarter lag, it strengthens to about 53%.

alt=''

12
  • Tweet  
  • Facebook  
  • LinkedIn  
  • Share on Whatsapp
  • Send to  
  • Topics
  • Bonds
  • Morgan Stanley
  • Bonds
  • US

More on Bonds

Will Hobbs of Barclays Wealth Management & Investments
Investment Conundrums: Barclays' Hobbs on why gold and bitcoin look 'vulnerable' to real interest rate increases
Bond markets are ready to twitch into action at the first sign of inflation, according to AJ Bell
A recipe for disaster? 'Coiled spring' bond market falls 'just the beginning', experts warn
Kimberley LaPointe of PGIM Investments
PGIM Investments adds to fixed income ESG offering with total return launch
The Eurizon SLJ Bond Aggregate RMB fund will be managed by Stephen Li Jen and Monica Wang
Eurizon SLJ Capital offers exposure to Renminbi bond market and local currency EMD with double fund launch
Dave Plecha of Dimensional Fund Advisors
Investment Conundrums: Dimensional's Plecha on why fixed income is 'as effective now as it has ever been'

Most read

Spring Budget 2021: Sunak freezes lifetime allowance for pensions contributions
Spring Budget 2021: Sunak freezes lifetime allowance for pensions contributions
Spring Budget 2021: Self-employment grants extended to September
Spring Budget 2021: Self-employment grants extended to September
A recipe for disaster? 'Coiled spring' bond market falls 'just the beginning', experts warn
A recipe for disaster? 'Coiled spring' bond market falls 'just the beginning', experts warn
Spring Budget 2021: Industry reacts to Sunak's 'fiscal ice age'
Spring Budget 2021: Industry reacts to Sunak's 'fiscal ice age'
Goldman Sachs AM names global head of sustainability and impact
Goldman Sachs AM names global head of sustainability and impact
Back to Top
Trustpilot

 

  • Contact us
  • Marketing solutions
  • About Incisive Media
  • Terms and conditions
  • Policies
  • Careers
  • Twitter
  • LinkedIn
  • Newsletters
  • Facebook
  • YouTube
  • Instagram

© Incisive Business Media (IP) Limited, Published by Incisive Business Media Limited, New London House, 172 Drury Lane, London WC2B 5QR, registered in England and Wales with company registration numbers 09177174 & 09178013

Digital publisher of the year
Digital publisher of the year 2010, 2013, 2016 & 2017
Loading