Q: Is there a particular region/sector attracting your attention at the moment within the asset class you cover?
The next phase of this economic cycle will be extremely interesting as the global economy, particularly the US, transitions from rapid fiscal-led growth to lower and possibly below-trend growth. Monetary policy tightening has taken longer than anticipated to feed through to the real economy and inflation looks likely to remain above 2% targets for the next year or more, forcing central banks to remain in restrictive territory for longer and slowing real growth rates.
Within this context, credit spreads in certain asset classes are pricing in reasonably elevated levels of risk premium, presenting attractive risk/reward dynamics. US agency mortgage-backed securities (MBS) market spreads look appealing, particularly when compared with corporate credit. While we think supply in agency MBS will remain low, the underlying credit quality of the sector is robust, and real estate has shown resilience to higher interest rates relative to other sectors.
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The European dynamic differs from the US. The transmission of higher interest rates to the real estate sector is more immediate due to the shorter-term nature of fixed mortgage rates. Although the European Central Bank began its cautious easing cycle in June, we anticipate a conservative approach to rate cuts over the next year, which could weigh on the European real estate sector.
Nevertheless, the broader outlook for Europe is positive. We see good value in European corporate debt, excluding real estate. Declining headline inflation has improved real disposable incomes for households across the continent, and higher yields have increased demand for fixed-income duration. Although president Macron’s surprise call for parliamentary elections in France caused some market jitters, we remain confident in the potential for further fiscal spending by the EU in the second half of the year, which should provide positive momentum.
Q: How do you see sustainable and ESG-oriented investing evolving from here within the asset class you cover?
Within the BlueBay fixed-income platform, policy and politics are central to our approach, which naturally leads us to focus on the social and governance aspects in developed markets. We prioritise assessing the issuer over bond-level labelled issuance.
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With more than half of the world’s population heading to the polls by the end of 2024, we remain focused on monitoring elections and evaluating the ESG credentials of potential new governments. The US election will be the most critical geopolitical event this year, following the war in Ukraine, and its outcome will have significant repercussions on trade, growth and global diplomacy.
Read the rest of this article in the July/August issue of Portfolio Adviser magazine
