Investor sentiment recovered over the third quarter of 2010, leading to a renewed appetite for risk, and so many equity markets demonstrated improved performance during September. Nevertheless, bonds and bond funds remained in demand.
According to figures released by the Investment Management Association (IMA) during September, sales of bond funds reached peaks previously enjoyed during the first half of 2009 and exceeded £1bn of sales for the first time since May 2009. Sterling Corporate Bond proved the best-selling IMA sector during August, experiencing its biggest-selling month since May 2009. In total, three of the top-five IMA sectors were bond-related – Global Bonds and Sterling Strategic Bond, joining Sterling Corporate Bond.
According to the Office for National Statistics (ONS), UK inflation increased by 3.1% year on year during August. At its September meeting, the Bank of England’s (BoE) Monetary Policy Committee indicated it might be prepared to support economic growth by adding further stimulus if necessary.
When UK interest rates finally start to rise, there is a risk corporate bonds might start to lose their gloss. Even so, it is worth noting strategic bond funds possess greater scope to invest in higher-yield bonds than funds that are obliged to focus only on investment-grade bonds.
The ONS confirmed the UK economy expanded by 1.2% during the second quarter, boosted by strengthening consumer spending and inventory growth, but also revised first-quarter growth up from 0.3% to 0.4%.
Meanwhile, the International Monetary Fund (IMF) has said it believes the UK economy is “on the mend” and supports the coalition Government’s planned cuts in public spending. That said, the IMF believes the BoE should be ready to reinstate its programme of asset purchases if the economic recovery shows signs of flagging.
The UK’s substantial budget deficit continued to put pressure on the coalition. However, investors were heartened by the news that ratings agency Moody’s Investors Service expects the UK to meet the challenges of a substantial budget deficit and a tough economic outlook. Moody’s reaffirmed the UK’s Aaa credit rating during September, citing the Government’s “commitment to stabilise and eventually reverse the deterioration in financial strength”.
The IMF expects the UK economy to recover at a moderate rate, predicting growth of 2% in 2011 – slightly lower than its previous forecast of 2.1%. For its part, the Confederation of British Industry also tempered its expectations for economic growth in the UK during 2011, down from 2.5% to 2%.
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