"In the absence of a secondary inflation shock, which could be caused by another spike in energy prices, we expect US Treasuries, UK Gilts and other sovereign bonds to deliver strong total returns over the next year or so as yields and interest rates fall."
He said they should also provide a good hedge in portfolios against weaker growth and the risk of a worse-than-expected recession.
Ed Smith, chief investment officer at Rathbones, also warned that inflation could be more persistent than many presently expected.
He said: “We believe the potential is for inflation to be higher in Europe than the US. Inflation will fall, but the question is by how much. “
Global warning
Smith said: “Major central banks, including the US Federal Reserve, the Bank of England and the European Central Bank, have reiterated that bringing down inflation as soon as possible remains their priority.
"Oil prices are well below their highs, and their impact on inflation should continue to fall into next year; food commodity prices are below their peaks; and pressures on global goods supply chains have eased considerably, but more progress is needed in other areas to get inflation all the way back to the low single digits.
"Services inflation has continued to rise and remains much too high, and labour markets must cool further, otherwise wage inflation may remain elevated."
He added: "Inflation is likely to remain higher for longer in the UK than elsewhere due to currency depreciation, rising inflation expectations and weakness in UK labour supply.”
In terms of what this means for investors, Smith said he had a preference for UK equities on valuation grounds and defensive equities ahead of cyclical equities.
david.thorpe@ft.com
