Shifts in geopolitics and fiscal deficits influencing the UK's bond market preferences
In the ever-evolving world of finance, several factors are driving changes in investor risk appetite. The ongoing conflicts in Ukraine, instability in the Middle East, and the unique economic policies under the Trump administration are primary influences.
A recent survey of 200 UK institutional investors reveals that 61% have adjusted their risk appetite due to geopolitical tensions. As a result, more than half of these investors are planning to shift money away from US assets and towards UK assets, seeking refuge from policy uncertainty.
The survey also indicates a growing interest in sustainable investment strategies. An impressive 90% of respondents plan to increase assets dedicated to sustainable strategies over the next 12-24 months. Among those maintaining an interest in private credit, asset-based lending emerges as the preferred segment.
Despite recent sell-offs in sovereign debt, nearly nine in ten investors are planning to stick with or add to their government bond allocations over the next year. This trend is particularly noticeable among large institutional investors, who are focusing on tokenized Treasury assets. The appeal lies in the benefits of better liquidity, regulatory compliance by design, and efficiency gains through blockchain technology, enabling faster settlement and real-time risk management.
The expectation of fixed income outperforming cash indicates an optimistic outlook for the asset class in the medium term. This sentiment is shared by 84% of surveyed investors, who anticipate fixed income to outperform cash in the coming period.
However, not all investors are maintaining a bullish stance. 55% of investors plan to adjust their private credit exposure, with most intending to reduce allocations. Ben Hayward, CEO of TwentyFour Asset Management, emphasises the importance of active managers in such times. He expects them to prove their worth by targeting the right opportunities while managing broader market risks.
UK assets currently make up nearly half of institutional portfolios, and this share is expected to increase over the next year. Sustainable bond funds are most likely to capture a greater portfolio share, reflecting a growing awareness and commitment towards environmentally and socially responsible investing.
In conclusion, the global financial landscape is witnessing significant shifts in investor behaviour, driven by geopolitical tensions, economic policies, and a growing focus on sustainability. As always, active management and strategic allocation will be crucial in navigating these changes.
