"We expect economic stagnation and a mild recession over the coming year in the UK." That may not be great for the UK as a whole, but as Josh Anderson, Portfolio Manager of the PIMCO GIS Income Fund, explains, it ought to be for fixed income markets.
"Given how much fixed income has repriced," he says, "if you have stagnation, a mild recession or modest growth, then you could do very well.
"Interest rates are expected to stay restrictive in the UK overall, but they may start falling at some point next year, which would raise bond values and allow holders to potentially benefit from capital appreciation.
"And even if interest rates don't fall, we'd expect bonds to offer a degree of safety and a predictable income compared to equities."
Cautious optimism on inflation
The rates picture will of course be heavily influenced by the UK's inflation trajectory. To date the UK has been lagging behind the US in getting inflation under control, but fellow portfolio manager Alfred Murata believes there is room for cautious optimism.
"In the US, the Fed raised rates aggressively and now inflation has come down dramatically," he says. "This dynamic has taken longer to play out in the UK, but I think the Bank of England has now caught up."
Murata adds that he now sees a steady fall in UK inflation over time. "Nothing dramatic," he says, "but just a continued weakening over the coming year, given the modest economic environment that we expect."
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