Mike Amey, the manager of the £647m Allianz Pimco Gilt Yield fund, says he is likely to convert some of his gilt investments into cash this year after warnings that the asset class is becoming fully valued.
After the coalition stabilised British political prospects, Amey moved away from short-dated bonds and cash and into bonds with maturities of five to 20 years.
He says short-dated bonds do not offer high enough interest rates to compensate for present levels of inflation. Equally, he sees risks in bonds maturing in 20 years or more owing to the unknown long-term effects of quantitative easing, which could include higher inflation.
In the medium term, Amey says gilts could become volatile because of varying levels of commodity inflation. (article continues below)
He says low growth and deleveraging are likely to leave core inflation low in the developed world. However, strong growth among emerging nations could cause commodity prices to rise, which would lead to temporary spikes in inflation in developed markets.
Amey is confident that the British government can implement its spending cuts after the Comprehensive Spending Review on October 20. However, he warns that private sector investment must be boosted to mitigate the effects of cuts.
He says Britain is increasing its lending by only 1% a year and the private sector savings rate has risen to 10% of GDP. Exports are unlikely to lead the recovery, he says, predicting that they will add only 0.5% a year to GDP in real terms.
“We aren’t going to see the unemployment rate coming down much,” he says.