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Aegon AM’s King: Markets will shift to ‘quality and income’ in new interest rate era

The new interest rate policy era will shift the market’s attention to ‘quality and income’ over ‘growth and higher valuations’, according to Aegon Asset Management’s Debbie King.

 

King, co-manager of the Aegon Diversified Monthly Income Fund, says she expects a normalized policy environment and benign economic outlook to result in a change of focus after a period in which a handful of growth stocks have dominated US equity market performance.

 

“As total return multi-asset investors, it has been frustrating at times to see a small number of growth stocks be responsible for a large proportion of US equity market returns,” she says.

“Whilst we like the long-term attractiveness of the technology stocks we own[1], we acknowledge the risks. Fierce multiple expansion driven by low to negative real rates and high expectations for corporate earnings growth rates creates downside risks for index levels if actual earnings fall short of forecasts.

 

“However, a broadening out of equity market returns by region and sector is a likely scenario under an expected ‘soft landing’ and ‘normalised’ policy rates environment. We expect this new era of interest rate policy to shift the market’s attention in favour of ‘quality and income’ over ‘growth and multiple expansion’.”

 

While investors should continue to have exposure to the dominant AI investment theme, King says the shift in monetary policy will benefit quality companies that boast strong balance sheets and generate high, recurring cash flows, enabling them to pay dividends.

“We have seen some of our utilities and financial sector names such as Iberdrola, Zurich Insurance and DBS Bank performing particularly well of late,” she says. “Going forward, we expect a larger proportion of the equity market’s total return to be driven by income.”

In fixed income, King says that, in real terms, the rate reset of the past few years has also made the asset class attractive, with all-in yields attractive even if credit spreads have fallen to the low end of historical ranges.

 

“Looking forward, future returns from investment grade bonds are essentially limited to the mid-single digit yields currently available and we have reduced exposure to this area,” she says. “Higher returns can be expected in sub-investment grade bonds where credit risks are higher. Here we prefer to take exposure to shorter maturity bonds where we capture attractive income but expect less price volatility than longer duration counterparts, due to the pull to par nature of bond redemptions.

 

“Cash proxies like short-dated government bonds continue to offer attractive defensive returns (4-5%) with minimal credit risk, and arguably are a better risk reward than longer duration bonds.”

 

King says risks to this view include higher than expected inflation resulting in higher interest rates, growth falling short of expectations, and/or a loss of confidence in artificial intelligence.

 

“Service price inflation in many countries remains elevated compared to pre-pandemic levels,” she says. “The recent decline in overall inflation is primarily due to reduced price pressures in goods and energy sectors. If disinflationary effects in these areas diminish then headline inflation could unexpectedly rise. Notably, container shipping rates have surged due to events in the Middle East, and this may impact goods prices.”

 

On the other hand, she points out that the Chinese economy is flirting with deflation, with low export prices to other countries and weak demand from China for imports likely to remain a deflationary force on the rest of the world. There is also the impact of forthcoming US elections to consider.

 

“The attempted assassination of Donald Trump and the withdrawal of President Biden have ensured the results and implications are difficult to predict,” she says. “Neither side is advocating greater fiscal responsibility. Higher tariffs on imports, as proposed by Trump, and even looser fiscal policy would both be inflationary.

 

“We cannot be sure what will ultimately happen but we believe the best approach is to exploit the consistency and stability of yield assets to provide an anchor to returns. Diversification of the sources of return is the primary way to reduce risk and we look forward to the market shifting its gaze to the quality and income parts of the market.”

 

 

-Ends-

 

Notes for the editor

 

About Aegon Asset Management

Aegon Asset Management’s investment capabilities span public and private markets across fixed income, real assets, equities, and multi-asset platforms. Our 385 investment professionals serve a global client-base of sophisticated investors, managing and advising on assets of USD 341 billion (€318 / £270 bn), (as of June 30, 2024). Across platforms, we share a common belief in fundamental, research-driven active management, underpinned by effective risk management and a commitment to responsible investment. Our 1,160 employees work across Europe, the Americas and Asia. To learn more, visit aegonam.com.

 

Media contacts:

Roisin Armit

Senior Communications Manager, Aegon Asset Management

+44 (0) 7583 162 643 roisin.armit@aegonam.com

 

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[1] The Aegon Diversified Monthly Income fund invests in in large-cap, established, quality tech such as Microsoft, Broadcom, and Taiwan Semiconductor Manufacturing Co. (TSMC)

Author

Roisin Armit
Senior Communications Manager

Roisin Armit, Senior Communications Manager, is a member of the UK marketing and is responsible for UK public relations at Aegon Asset Management. 

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