The Covid-19 pandemic has only ‘emboldened and strengthened’ the argument for including fixed income in investors’ portfolios, according to Fidelity International investment director, fixed income, Andrea Iannelli.
Speaking in the above video interview, Iannelli picked out two reasons why – the first being that “the higher-quality end of the fixed income spectrum has proved yet again to be an area investors should not underestimate, if only for its ability to reduce portfolio drawdowns and protect capital at times of heightened volatility”.
‘Precautionary savings will grow’
Looking to the longer term, Iannelli suggested a second element that should continue to play in favour of fixed income assets – and high-quality fixed income assets in particular – would be an increase in consumer savings. “The stock of savings globally is already very high but precautionary savings will likely continue to grow as a result of the shock caused by the pandemic itself,” he said.
“Fixed income is perhaps the first natural home for some of these savings – especially for investors who are searching for high-quality and defensive income – in an environment where volatility will remain high and we will see other bouts of uncertainty and risk-off in the months ahead.”
Other questions addressed include the particular risks fixed income investors should bear in mind in the current environment; whether this year’s market volatility represents a time to play it safe or a golden buying opportunity; the degree to which ESG considerations play a part in the thinking of fixed income managers; and how the fixed income market should develop over the next three to five years.
‘Natural home’
“From a demand point of view, the stock of savings that has to find a home keeps increasing by the day,” Iannelli noted on that last issue. “To put things into context, at the end of 2019, if we look at the cash that was sitting on bank deposits in Europe alone – so not including government bonds – we are looking at a figure in the region of €10 trillion [£8.6trn].
“This is all cash that does not receive any income – indeed, if anything, it gets charged for being in a bank account. So these are saving deposits that will need to find alternative avenues that, at the very least, generate a positive real return – and fixed income is going to be a natural home for that money to end up, supporting the market.”
