Standard Life’s Gibbs favours UK bonds over Japanese


Standard Life Investments bond manager Jonathan Gibbs is cautious on Japan following concerns that the country may not meet its inflation target, favouring instead the outlook for inflation and better breakeven rates in the UK.

The manager of the £1.2bn SLI Global Index Linked Bond fund highlights two current concerns that inflation may not average more than breakeven rates in Japan, while there is a greater likelihood that inflation will be above expectation in the UK.

He says: “There are opportunities in these markets at the moment. We like UK breakeven rates, but we don’t like Japanese breakevens. These are both strategies that we are looking pretty hard at.”

Gibbs is skeptical that Japanese inflation expectations “have gone too far for now” with forecasts predicting inflation will average 1.5 over five years, despite the current inflation level sitting around zero.

In the UK, Gibbs says that he expects the retail prices index will rise above what the market is currently pricing in, making inflation-linked bonds and breakevens appear cheap relative to gilts at present.

He adds: “If you look at the differences between RPI and CPI and build this on top of the 2 per cent CPI target, and if you believe that the Bank of England is capable of delivering an average of 2 per cent over five to 10 years, then the chances are RPI is going to be above what the market is pricing in at the moment.”

Elsewhere, Gibbs says he is looking to possible future opportunities in Turkey and Mexico, where he likes breakeven rates.

However in the case of Mexico, Gibbs would have to use Mexican inflation swaps in order to express this in the fund. He says: “These are slightly non-standard and quite illiquid.

“So any use of those will be very carefully thought about before we go into it and I don’t envisage it in the next few weeks.”