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DailyBubble News

Mixed and total return sector review – what’s next for bonds and shares?

In the past year, the global economy has continued its recovery from the effects of Covid-19, which saw global GDP shrink by 3.1% in 2020. World economic output is now forecast to rebound by 5.9% in 2021 and is on course to set the fastest post-recession pace of a recovery in the last 80 years.

The recovery hasn’t been a completely smooth ride, though, and has differed by country and region. Coronavirus vaccines have helped ease and lift lockdowns, but their rollout has varied widely by country.

Covid-19 led governments and central banks to step in and support economies in the first half of 2020. Interest rates were lowered further, and governments borrowed more money to prop up economies. These measures have been important in supporting countries through the crisis and enabling their recovery. They have also helped calm investors’ fears.

The past 12 months have been positive for major share markets, which have risen with many at or near all-time highs. The UK, US and global share indices all returned more than 30%* in the past year. As always, past performance isn’t a guide to future returns.

In the UK, sectors like banks and oil & gas have been standout performers after suffering large losses in 2020. These cyclical companies do well when the economy is doing well. And after a 9.8% fall in 2020, the UK’s economy has bounced back and grown steadily in 2021.

It’s not been such a positive story in emerging markets, though. The FTSE Emerging index grew by 10.75% in the past 12 months. On its own this is an impressive return over a one-year period, but it lags well behind the FTSE World return of 32.29%.

Vaccine rollouts in emerging market countries haven’t been as fast overall as those in developed markets. China, which makes up a large part of the emerging market index, has had a challenging time, with the FTSE China index down by -9.4% over this period.

Asia & emerging markets review – Russia storming ahead while China struggles

What could the future hold?

With the worst of the pandemic seemingly behind us, governments and central banks are now starting to take away their support, to varying degrees.

The US Federal Reserve recently announced a reduction, or ‘tapering’, of its stimulus programme. Some countries like Norway, Brazil and South Korea have already started raising interest rates. Over the next couple of years, the US Fed is expected to begin raising rates, while the Bank of England could begin increasing rates much sooner.

This is all to help tame inflation, which has been on the rise around the world in 2021. Supply constraints, rebounding demand, and ‘base effects’ compared with much lower 2020 prices, have all helped push inflation higher. Supply typically adjusts to meet increased demand and keep a lid on prices. But the pandemic has disrupted supply chains around the world, causing goods shortages to be unusually persistent.

Key central banks of the US, UK and EU don’t expect higher inflation to be here to stay, but it’s expected to stick around into 2022. So, it still has the potential to speed up so-called ‘tightening’ of monetary policy. This involves raising interest rates to make borrowing more expensive to help bring inflation back down towards their targets. This is a balancing act though. Raising rates too far or too soon could stall the economic recovery, and could be tough for markets to digest.

Bonds returned -0.92% over the past 12 months as the signs of inflation became more apparent. Inflation reduces the value of the cash flows that bonds pay to investors. It can also prompt central banks to increase interest rates, which in turn pushes down bond prices.

Today’s outlook for bonds doesn’t look as positive as it’s been in the past. Current bond yields give an indication of possible future returns. So today’s low bond yields suggest returns could be low in the future. Remember though, yields are variable and not guaranteed.

However, that doesn’t mean bonds should just be cast aside. We still think bonds have their place in a diversified portfolio, smoothing out the ups and downs compared to only investing in shares.

This article isn’t personal advice. If you’re not sure whether an investment is right for you, ask for financial advice. Investments can rise as well as fall in value, so you could get back less than you invest.

How have mixed and total return funds performed over the past year? (% growth)

Past performance isn’t a guide to future returns. Source: *Lipper IM, to 31/10/2021.

Oct 16 – Oct 17 Oct 17 – Oct 18 Oct 18 – Oct 19 Oct 19 – Oct 20 Oct 20 – Oct 21
IA Flexible…

Read More: Mixed and total return sector review – what’s next for bonds and shares?

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