From fixed income to UK equity income: a tactical shift

The article argues for a tactical shift out of bonds into UK equity income for multi-asset portfolio

Fixed income under pressure: the case for UK equity income

​Hoshang Daroga CFA, Investment Director at Elston Consulting
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Given the diverging outlooks for equities and bonds, we are making the case for up-allocating equities over bonds across as a tactical shift in asset allocation.

Macroeconomic backdrop

​Global growth remains resilient, but labour markets are beginning to show signs of slowing. Macro indicators continue to suggest that a soft‑landing scenario is more likely than a deep recession. Price pressures are moderating, but the impact of tariffs is still unclear, and inflation is likely to stay elevated because companies are expected to pass higher costs on to consumers. Interest‑rate policy is expected to shift toward supporting a weakening labour market rather than prioritising inflation control, with a likely dovish Federal Reserve chair creating a more supportive environment for equities and a less favourable one for long‑duration bonds.

Within equities, UK equity income provides defensive value

​Valuation premiums in equity markets are concentrated in a small number of growth names, and portfolios are already highly focused in these areas, meaning that adding further exposure to the US market could increase overall portfolio risk. UK Equity Income currently offers yields of around 4%, which exceed the averages found in most developed markets. The UK equity market also has strong representation in energy, financials, and consumer staples—sectors with resilient earnings and stable dividend policies that help them perform well in inflationary conditions. Companies with pricing power and established histories of dividend growth can contribute to maintaining real income within portfolios.

Within bonds, debt affordability inflation remains a risk

​Within the bond market, current yields already incorporate much of the expected monetary‑policy easing cycle, which limits the potential for further capital gains. Duration risk remains elevated, and bond prices could come under renewed pressure if inflation proves stickier than anticipated. Credit spreads are tight, offering limited cushion for investors in riskier debt instruments.

A tactical shift from fixed income to UK equity income

​From a portfolio perspective, increasing equity exposure allows investors to capture the upside associated with a pro‑growth environment and the potential for multiple expansion. Reducing bond allocations helps avoid the drag from muted fixed‑income returns and decreases sensitivity to interest‑rate volatility. Redirecting part of the fixed‑income allocation into UK Equity Income raises portfolio yield without materially increasing volatility relative to broad equity markets. The combination of valuation re‑rating potential and sustainable dividends results in an attractive risk‑adjusted return outlook for UK Equity Income.