“Over the course of the past month, global events have dampened economic growth and exacerbated supply-driven inflation, with Europe most exposed among developed markets. Rising inflationary trends kept inflation-adjusted yields near record lows, even as nominal yields sprinted upwards. Central banks are scrambling to normalise policy and raise rates this year – but we don’t expect them to go quite as far in terms of total number of hikes, as the market currently anticipates. We expect long-term yields to edge up, as investors demand more compensation for the risk of holding bonds amid high inflation. In this environment, we are underweight government bonds and favour equities over credit. Many developed markets’ companies have passed on rising costs to consumers, and we see low real rates, the restart’s economic growth cushion, and reasonable valuations favouring equities.
Over the course of March, we saw funding levels improve. This was influenced by conventional yields generally being up 0.2% across the curve, which led to falling liabilities.
Given the ongoing challenging context, pension schemes should continue to ensure their portfolios are adequately diversified and hedged. Further, as the current energy shock creates investment needs in both traditional energy and renewables in the near term, schemes should consider alignment with the long-term net-zero transition, which we believe will trigger a great repricing of assets across the board, over time.”
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