Iain Stealey, international CIO of GFICC at JP Morgan Asset Management, discusses where he is finding value, how AI-led investment is reshaping credit markets, and why investors should stay focused on the long term.
Can you explain the portfolio’s approach to investment and what it is trying to achieve for investors?
Fixed income markets are being shaped by complex monetary, credit and fiscal cycles alongside elevated geopolitical uncertainty and changing dynamic bond-equity correlations. We believe there is value in an unconstrained approach that allows investors to move flexibly across sectors and markets rather than being tied to a traditional benchmark.
The Global Bond Opportunities fund aims to deliver enhanced total returns over a market cycle, within a 5-10% volatility target range. It combines top-down and bottom-up analysis, drawing on expertise of more than 300 sector specialists globally. Fundamental, quantitative and technical research are brought together to compare opportunities across fixed income and build the portfolio.
Which areas of the fixed income market are you most excited about and which areas are you avoiding?
The recent pessimism on bonds has simply gone too far and created quite a few investment opportunities. Our team does not want to miss the chance to invest at yield levels last seen 20-30 years ago. Of course, at this point in the cycle, reliance on our credit research teams is more important than ever. High single-digit returns over the next 12 months are probable.
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We favour a globally diversified portfolio across credit, emerging market debt (especially local currency bonds), and the long-end of government bond markets.
What is your average rating and duration? Has this changed since the start of the year? If so, why/why not?
We added duration on the recent backup in yields, where we see strategic value in the longer end of government yield curves, particularly in Australia, Japan, and the US. Headline duration in the flagship Global Bond Opportunities fund is now in the 80th percentile relative to historical positioning. The fund has maintained an investment grade average credit rating year-to-date, given our focus on accessing diversified sources of high quality, resilient carry.
How positive are you in terms of finding new positions for the portfolio, compared to previous years?
In sourcing new positions, the first place to look this year is the primary market. In credit markets, a fast-moving AI capex supercycle is driving record public and private debt issuance, and increasing the need for rigorous bottom-up credit analysis.
As AI-themed capex from hyperscalers gathers pace and broadens across the economy, rising demand for power, water, semiconductors and other hardware to support the AI buildout is set to benefit the adjacent capital goods and utilities sectors.
Readily available capital also supports an extension of the capex cycle into secular growth sectors, particularly aerospace and defence, energy, and healthcare, where investment is top-of-mind for many sovereign nations.
Meanwhile, the recent expansion in real yields, and the many disconnects and inconsistencies in markets, has also created attractive entry points across government bond yield curves. We expect investment opportunities will continue to be generated as the news flow around geopolitics, fiscal spending, and debt supply evolves.
How are you dealing with interest rate uncertainty across regions at the moment?
The return to the financial world that existed before the financial crisis provides an opportunity for active bond managers. There is demand for capital because there is a real productive use for that capital, which means there is going to be competition and cost for that capital, and we are in the business of pricing it. The result is a much healthier bond market, with higher yields – both nominal and real yields are close to pre-financial crisis levels.
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Longer-dated government bonds are starting to look attractive again as policymakers get tougher on inflation. We expect central banks to hike rates a couple more times and then follow where the economic data leads them.
A US Federal Reserve hiking cycle of 50-75 basis points would be minor by historical standards, but perhaps all that is needed. The market has already priced this in, and more. In our view, yields could settle close to current levels, and that represents a compelling entry point for investors.
What is the best piece of investment advice you have ever been given?
Stay invested, don’t confuse forecasting with timing. In fixed income, the power of compounding your coupon income is often underestimated, and it works best when you’re in the market through the full cycle.
