“As we prepare for a new interest-rate cycle in the US, if not in September then soon, we see limited return potential from duration risk in the short to medium term,” he said.
“However, in an environment where interest rates in the US move higher, accompanied by continued quantitative easing in Japan and Europe, we are likely to see increased return potential from currencies. After the weakness in recent months, we also see potential for the risk premium attached to high yield credit to move lower from here.”
Dunham said his current strategy can be summed up as ‘a broad set of modest exposures’.
“We reduced duration on our government bond holdings as the market rallied, and have benefited from exposure to a number of peripheral European countries as investor confidence in this area begins to recover,” he said.
“We have some exposure to emerging debt, and are particularly positive towards Poland and Mexico, where yields look attractive and steep yield curves mitigate the cost of hedging the currency exposure,” Dunham added.
He also noted that while Baring does not have a large exposure to high yield credit he does see increased potential from the asset class after the recent sell-off.
