Investment Weekly: Gilts go back to the ‘90s
4 May 2026
Key takeaways
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The US stock market is back at new highs but still trades at the same price-earnings (PE) ratio premium. Many other global markets have seen re-ratings. Why? The answer lies in profits.
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Emerging market bond yields rose sharply early in the Middle East conflict, driven by fears of an energy-driven inflation spike. But since the early-April ceasefire, EM local rates and currencies have recovered impressively, especially in some of the worst hit economies, like Hungary, Mexico, and South Korea.
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Former Fed Chair Janet Yellen once quipped that growth cycles “don’t die of old age” but end because of external shocks or policy mistakes. In his new book, Recession, Tyler Goodspeed agrees that US downturns have rarely been the product of a single cause.
Chart of the week – Gilts go back to the ‘90s
UK Gilt yields are at their highest since the Bank of England independence. Should investors fear the bond vigilantes? Or is the income opportunity too good to ignore?
Even with 30-year Gilt yields back to late 1990s levels, it’s fair to say that most of the recent action has been at the short end. In March, rate expectations surged, with markets forecasting three hikes from the BoE in 2026. In April, that’s dropped back to just over two hikes. So, what happens to long-term Gilts if those rate hikes are delivered?
One possibility is that long-term bonds would sell off even more. After all, investors are worrying about high UK debt, the inflation-prone economy, and less policy co-ordination than in Europe. But there is also a lot of bad news already baked in, meaning that yields themselves can shape the short term.
The long end can rally, even if the BoE is hiking. That can happen if growth concerns begin to dominate, if inflation credibility is restored, or if investors are attracted by the income opportunity. And finance theory tells us that high starting yields and upward sloping curves are the two best predictors of high future bond returns. The quantitative signals are starting to look good for Gilts.
So, while the yield curve can steepen further, the carry in Gilts is hard for investors to ignore.
Market Spotlight
Broadening out into dividends
US growth and AI continue to be a key focus of global equity investors. But one return driver that attracts far less attention – but still accounts for a major part of total returns – is dividend income, and it’s becoming harder to ignore.
There are a few reasons for this. First, dividends have been a major engine of wealth creation. Since 2000, reinvested dividends have driven more than half of cumulative equity gains in many markets.
Second, dividend streams can steady the ride. History shows that dividend payouts are less volatile than profits, offering an anchor in times of stress, especially in firms with resilient cash flows and balance sheets.
Third, dividend yield has behaved like a stock “factor”. Since 2005, it has delivered positive returns in quant strategies across different macro regimes – especially in recoveries, high inflation, and higher-rate environments.
For portfolios, a market research shows that high-quality dividend payers can complement long-duration growth, cut reliance on single themes, and reintroduce income as a source of return.
The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. Past performance does not predict future returns. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Source: HSBC Asset Management, Factset, Bloomberg, Macrobond. Data as at 7.30am UK time 30 April 2026.
Lens on…
Profits at a premium
The US stock market is back at new highs but still trades at the same price-earnings (PE) ratio premium. Many other global markets have seen re-ratings (see chart). Why? The answer lies in profits. US profits growth is pencilled in at around 15% in 2026, which has kept the valuation arithmetic in check. Meanwhile, other regions have seen PE discounts turn into PE premiums. Taiwan stands out as the most “expensive” market relative to its history, sporting a premium to its average PE of over 20%. That’s down to its central role in the AI hardware supply chain. South Korea also benefits from AI excitement, but despite strong price momentum, expected profit growth of 100% keeps the market trading at a discount. Also noteworthy is Brazil, a major oil exporter, where last year’s 30% PE discount is now a 7% premium. That partly reflects a pick-up in investor sentiment towards emerging market risk. |
Overall, there are signs that global PE discounts are drying up, which means investors need to work harder in the search for value.
Emerging resilience
Emerging market bond yields rose sharply early in the Middle East conflict, driven by fears of an energy-driven inflation spike. But since the early-April ceasefire, EM local rates and currencies have recovered impressively, especially in some of the worst hit economies, like Hungary, Mexico, and South Korea. It’s an interesting signal about the growing resilience of EMs. The initial sell-off was caused, in part, by investors assuming the 2022 playbook of rapid monetary tightening. However, EM policy has moved on since then. Several EM central banks – such as those in Mexico and South Africa – were already leaning towards rate cuts when the conflict began. Many still have high real-rate buffers to protect against elevated inflation, as well as credible policy frameworks. Put together, this limits the need for EMs to overreact to an energy-price shock that may prove transitory. |
That said, it could still be tough for EM yields to fully return to pre-conflict levels in the near term. Higher spot inflation and the risk of drifting inflation expectations mean that front-end rates could stay sticky, while the energy disruption passes into prices. Even so, it’s evident that EMs have become more resilient to external shocks.
What causes recessions?
Former Fed Chair Janet Yellen once quipped that growth cycles “don’t die of old age” but end because of external shocks or policy mistakes. In his new book, Recession, Tyler Goodspeed agrees that US downturns have rarely been the product of a single cause. It’s often a cocktail of reasons, ranging from commodity and labour disruptions to outright “financial accidents”. The deepest and most persistent slumps have often coincided with wars. Adverse supply shocks, negative confidence effects, and tighter financial conditions can all amplify downturns. |
Goodspeed’s observations are useful given the current energy shock. He points to oil price spikes as a primary recurring cause of post-war US recessions. And he challenges the standard boom-bust cycle theory of economics, claiming supply-side shocks like energy disruptions act as a “choke point” for economic growth by hiking costs across the economy simultaneously. The problem for policymakers is that supply shocks are particularly hard to deal with without spurring higher inflation or unemployment. That’s why the messaging from central bankers at last week’s round of policy meetings was watched so carefully.
Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Costs may vary with fluctuations in the exchange rate. Source: HSBC Asset Management. Macrobond, Bloomberg, Refinitiv, Factset. Data as at 7.30am UK time 30 April 2026.
Key Events and Data Releases
Last week
This week
For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Source: HSBC Asset Management. Data as at 7.30am UK time 30 April 2026.
Market review
Global equities came under pressure as oil prices rose towards 2026 highs. US stocks traded modestly lower in a key week for Q1 earnings reports in the technology sector, with the Philadelphia Semiconductor Index retreating after recent strong gains. While the Euro Stoxx 50 and the FTSE 100 extended recent weakness amid rising European growth concerns, Nikkei 225 consolidated after reaching a historic high. Other Asian bourses traded mixed: stronger tech stocks lifted Kospi to a fresh record high, alongside gains in Shanghai Composite, whereas Sensex and Hang Seng fell. In rates, investors continued to assess the monetary outlook following major central banks’ policy decisions. US Treasury yields rose on ongoing inflation worries, with European and Japanese yields also rising.
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