Macroscope | High interest rates and slow earnings growth make bonds attractive to investors
- Bond markets appear aligned with the consistent messages of higher inflation rates and slowing corporate earnings, with corporate bonds delivering good yields
- Equity markets remain volatile, even though the long-term outlook is positive
Financial markets continue to reflect two important themes. The first is that interest rates are going to remain significantly higher than the average of recent years until there is unequivocal evidence that inflation is returning to a more comfortable level. The second is that corporate earnings growth is slowing.
The question for investors is whether current market pricing has fully incorporated those two trends. My view is that bond markets are aligned with the messages coming from central bankers and therefore offer some attractive opportunities for investors.
However, equity markets remain subject to the risk that more bad news might be coming. This means returns from equity markets could be quite volatile in coming months, even if the long-term outlook remains positive for equity investors.
Officials from central banks have continued to warn that current inflation levels are too high and monetary policy might need to be tightened further to bring down inflation. Until recently, markets had not quite got the message and were encouraged by lower headline annual rates of inflation.
Economists generally see inflation falling further in coming months as lower global energy prices, reduced pressure on supply chains and base effects combine.
