Three stories have dominated the summer headlines, two of which – China’s slowing economy and Greece’s ongoing stand-off with its creditors – are either highly troubling or simply market noise, depending on who you ask.
However, there is no contesting the possible impact of the impending interest rate hikes; likely first from the Federal Reserve, potentially due in September, followed by the Bank of England, the timing of which is much more difficult to pin down.
While some are grumbling about perceived dallying on implementing the initial rate rises, Thesis Asset Management’s investment manager James Nield believes the central banks have been proactive in their approach.
“Markets should have been talking about interest rates a year ago. But what has surprised everyone is the extended timescale of the likely rise.
“The way policymakers have dealt with the financial crisis fallout from the start has been unprecedented, and we are now in uncharted territory in terms of them preparing markets and consumers for hikes. We have not seen challenges of this scale before, and the response from policymakers has been appropriately radical.”
Corporate calls
Despite the ‘slow and steady’ interest rate uptick promised by both the Fed and BoE, consensus is becoming increasingly concerned over the potential hit on the already illiquid bond markets.
But for Nield, portfolio diversification has always been the main reason to hold fixed income. “Fixed interest can deliver high-quality income but almost by definition cannot keep up with inflation,” he says. “We are not doing an inflationary trade – we have not had inflation for years – but fixed-interest markets have not been a real market since central banks became the sole buyer.”
Having reduced his sovereign bond allocation to zero in summer 2014, Nield prefers to get his fixed-income exposure in the credit space, deploying his 25% medium-risk weighting through funds such as Royal London Corporate Bond and Muzinich Global Tactical Credit Hedged.
“Over time we have become increasingly cautious on gilts and are only exposed to dedicated corporate bond funds or strategic funds with a corporate bias,” he adds.
“We are not in love with corporate bonds, it is more about retaining a minimum level of exposure for diversification. That said, corporate default rates across the globe have been limited, so our bias has been vindicated.”
