Chairmans Review and Outlook

Review of 2024 

The end of 2024 marks another positive year for bond markets. Interest rate cuts from global central banks and spread compression, across all ratings, bolstered returns, though not to the extent which was anticipated this time last year. 

In the United States, investment grade corporate bonds rallied to the tightest level compared with sovereign debt since 2007 with similar trends followed in Europe and the United Kingdom, though to a lesser extent. Tight credit spreads demonstrate perceived strength in corporate fundamentals, a trend that the re-election of Donald Trump is set to continue as his policies are expected further to strengthen the US economy. The process of spread compression has a greater benefit for lower rated corporate bonds in the short-term; the lowest credit rating bucket (CCC) returned approximately 15% during the year, compared to 1.4% for A-rated bonds. However, the downside risk has increased and so the Naisbitt King Asset Management (NKAM) investment committee therefore began to de-risk your portfolio by increasing the allocation to higher quality corporate bonds through the year. 

I am pleased to report that all NKAM portfolios have significantly outperformed the benchmark this year, extending their gains over the longer term. The greatest contributor has been from our investment in Additional Tier 1 (AT1) bonds. The sector returned an impressive 13% during the year and has been a long-term overweight position in our portfolios. Our confidence is founded in the strength of systemic global banks, who are highly capitalised and have significantly stronger balance sheets than before the 2008 financial crash. The spectre of regulatory tightening has even led to US banks increasing their equity capital levels, in turn protecting junior bonds. This has resulted in a dearth of AT1 issuance and, in our opinion, caused AT1 issues from US banks to look overvalued compared to European equivalents also issued in dollars.  We have thus taken steps to rebalance your portfolio.  

Outlook for 2025 

The known unknown in 2025 is Donald Trump and his protectionist stance to US politics. Trump’s populist manifesto to support US manufacturing and increase exports, among other measures, bears the risk of stoking inflation with tariffs. Dollar devaluation is also on the president-elect's mind and may involve fiscal stimulus, or even monetary easing. This would require Trump to exert soft power over the Federal Reserve by nominating dovish governors; a tactic that has been used by previous Presidents but may be contentious. It is difficult to draw a clear line to the overall effect given the derivative implications of these policies, or whether the implementation will in fact happen as Trump would like, but we are closely monitoring forward guidance from the incoming administration for how this will affect your portfolio. 

Likewise, the Federal Reserve is factoring the Trump effect into its forecasts for interest rates over the next 24-months. It seems, because of Trump, the Federal Reserve will be more cautious in reducing rates in 2025 than previously anticipated. Therefore, bond markets may become range bound without the stimulative promise of rate cuts. However, as active managers, NKAM has an opportunity to earn outsized returns, selecting winners and losers who are best able to adapt to a new interest rate scenario.  We anticipate index level bond returns aligning with 10-year averages, notwithstanding what could possibly be a large, unexpected deterioration in the global economy and we expect to outperform our benchmark and peers as we have reliably done in past years.

Wishing you all a wonderful year ahead,

Alastair King