Time to look further afield
One way to accomplish this is to divide fixed income holdings into three core components: core stable positions, return-seeking positions, and defensive positions.
Core stable positions are those with small, but steady, income or gain potential and a low risk profile, and may include high-conviction positions in markets with a low fat-tail risk, as well as shorter-dated investment-grade corporate products. For example, we have been overweight specific Asian local markets, such as South Korea and Thailand. Asia is fast moving into a new wave of central bank easing, offering attractive opportunities for bond investors. Closer to home, the recent correction in periphery country spreads allowed us to reinstate a position in Portugal.
Return-seeking positions include high-conviction investments that have strong potential for capital gains or high income characteristics. They may include locally denominated emerging market debt and select high yield names.
We have increased recently our allocation to long-maturity local Mexico bonds, as prospects for inflation remain subdued. At the same time, we have added to selected number of European high yield names. These offer attractive coupons and a relatively short maturity, thus avoiding unnecessary marked to market price volatility.
Defensive positions are typically those are unlikely to perform unless in a risk-averse environment, such as inflation-linked products and short positions in vulnerable currencies and sectors. For example, we made a contrarian move to buy the Japanese yen during the past 12 months. While the yen is likely to depreciate over the medium term, it often acts as a safe haven currency at time of market stress, and therefore provides a decent insurance policy against risk positions. Towards the end of January, we also decided to short the Turkish lira to finance a long position in the Russian rouble, which is a good way to remain Emerging Market currency neutral, while expressing a preference for the Russian rouble from a fundamental perspective.
