According to the Invesco Perpetual Henley fixed interest team, the firm remains cautious even though 2016 begins in a slightly stronger position than 2015. “In 2015 we saw some volatility, particularly within credit markets, and yields and spreads are both higher than at the start of 2015,” it said.
However, there is still reason to be careful. “While the credit market as a whole is less expensive, bond yields are still very low and in many cases the yield increase of bonds we would want to buy has been modest,” said the team.
As a result of this, the team says it currently prefers equity as a source of income within its mixed asset funds, as the low level of bond yields presents a low hurdle rate for equities to outperform.
However, within its bond allocations it says: “We are maintaining a low duration position, preferring to take credit rather than interest rate risk”. At the same time, the team says it is important not to stretch for yield and is focusing on the better quality end of high yield bond market, some investment grade corporate bonds and the financial sector in terms of positioning for 2016. “Against this we have a lot of liquidity across the board. This gives us a lot of flexibility so if volatility picks up, we are well positioned to take advantage of it.”
The team expects to see an increasing focus on the macro-economic cycle and its opportunities as the market normalises after the 2008 financial crisis. “This should bring to the fore opportunities for duration positioning; yield curve trades, relative value trades and foreign exchange opportunities,” it said.
The team believes in some secondary-market opportunities and some stock-picking opportunities in fixed income. “Overall I think the high yield market has improved through 2015 but investors should still manage expectations about the capital upside and think of this as an asset class that has the potential to provide reasonable levels of income.”
Meanwhile, investment grade corporate bond markets are still challenging, according to Invesco’s team. “In terms of opportunities – the one sector that we are still focused on is financials given they continue to improve their balance sheets and are still under the regulatory spotlight,” the team commented.
