Demand for corporate bonds falls

According to the Investment Management Association (IMA), net retail sales in the UK experienced their best-ever January . However, sterling corporate bond funds proved to be the least popular sector during the month, despite having headed the IMA’s sales charts for the first eight months of 2009.

During January, the sterling corporate bond sector experienced outflows of £228m. Overall, bonds accounted for only 17% of net retail sales during the month although they were the highest-selling asset class within the institutional sector.

While demand for bonds has waned somewhat, market watchers still see good value in the UK corporate bond sector – although many experts advocate careful issuer selection. Low interest rates and expectations of relatively subdued inflation should provide a supportive environment for bond markets in general. Meanwhile, amid growing evidence that the economic recovery is gathering pace, high-yield bond issuance appears to have picked up, indicating that investors are becoming more sanguine about the economic recovery and are therefore more willing to take on risk.

In his last Budget before the General Election, Chancellor of the Exchequer Alistair Darling confirmed his previous forecast for UK economic growth of 1% to 1.5% in 2010, but reduced his previous forecast for 2011 to 3% to 3.5%, bringing his predictions for 2011 in line with those of the Bank of England.

The Chancellor expects the budget deficit to decline from 11.8% of GDP to 4% by April 2015, but plans to postpone spending cuts until 2011 in order to allow the economy time to recover. Meanwhile, political uncertainty is weighing on the pound amid growing fears of a hung parliament after the General Election. Such an outcome would be likely to reduce the chance of a swift and decisive resolution to the budget deficit.

The Confederation of British Industry (CBI) warned that the UK’s economic recovery is likely to be “slow and sluggish” during 2010, hampered by consumers’ ongoing desire to save rather than spend. Overall, the organisation expects the UK to register economic growth of 1% in 2010 and 2.5% in 2011, but warned of the “lack of a clear driver for growth”.
According to the CBI, UK factory orders continued to recover, boosted by a rise in export orders. It foresees UK export orders “”steadily improving as global demand is starting to recover”, but warned that domestic demand remains very weak, which might hamper growth in manufacturing output.
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