The Good: More Heat, Less Heating

Europe experiencing warmer than usual weather seems to finally be offering a glimmer of hope for consumers, who continue to be beaten down by hot inflation. These unusually high temperatures, which are expected to continue in the coming few weeks, are delaying the seasonal increase in heating demand. As a result, European gas prices have been plunging from the peaks reached over summer as fears of shortages this winter have eased. EU natural gas storage now stands at 93% capacity, in comparison to a 5-year seasonal average of 89%, with benchmark gas futures prices 70% lower from the August highs, reaching their lowest levels since Russia cut supply.

Within times of crisis comes great opportunity, and although bond investors will be licking their wounds after a torrid 2022, they will know that historically poor years have tended to be followed by really good years in bond markets. This is because a narrative change has tended to occur, where central bankers turn less hawkish, and declining interest rates begin to be priced into markets. Since the inception of the BACB Index, the total return in a year following a downturn has never been negative. After more than decade of unappealing yields, investor appetite for the asset class has begun to tick up, with many global bond indices having seen large inflows in recent weeks.

In fact, spreads and yields have increased to such an extent that Scott Minerd of Guggenheim said the current bond market has provided “perhaps the greatest investing opportunity of a generation”. We have been taking advantage of this opportunity, increasing our exposure to bonds in the Global Balanced Fund from 0% to 15% in recent months.