Institutional investors and wealth managers are bracing for a shift in the correlation between bonds and equities, with expectations leaning towards an increasingly negative relationship over the next 12 months.
The study by Managing Partners Group (MPG) revealed that indicated that 43% of respondents anticipate a reversal in the recent trend of positive correlation between the two asset classes, wherein both rise and fall together.
Conversely, 31% of participants foresee the correlation becoming more positive, while 24% believe it will remain unchanged. This sentiment is driven by apprehensions surrounding potential economic downturns in major economies, prompting a heightened interest in longer duration core fixed income assets offering a blend of portfolio diversification, attractive yields, and capital appreciation, thereby appealing to investors seeking stability amidst uncertain market conditions.
The research indicated a significant inclination towards increasing allocations to longer duration core fixed income assets, with 69% of respondents expecting such allocations to rise in the coming year. This contrasted with only 29% anticipating no change in allocations and a mere 2% remaining undecided.
Among fixed income asset classes, US investment-grade corporate bonds and UK Government bonds are in favour for their attractive risk-return profiles, with Swiss government bonds, EU government bonds and UK investment grade corporate bonds also receiving high ratings.
Additionally, the study found that professional investors anticipate credit ratings and downgrades to align with historical trends, reflecting confidence in the resilience of corporate balance sheets amidst a slowing global economy.
Jeremy Leach, chief executive officer at MPG, said: “Concerns that the global economy is heading for recession is driving a switch to longer duration core fixed income, but at the same time, there is less concern about credit ratings and downgrades due to relatively robust corporate balance sheets if the economy does slow down.”
