Back in early-December, we asked industry commentators to share their views about what they think will unfold in markets in the coming weeks:
‘Elevated yields provide cushion to protect returns’
Eduardo Sánchez, head of fixed income and absolute return research, Square Mile Investment Consulting and Research
After the worst period of performance on record for fixed income assets, providing a constructive view of the asset class is a challenge. Even so, after the dramatic repricing, valuations are now at cyclical lows, and the elevated yields provide a healthy cushion to protect returns should interest rates continue on their upward trajectory.
The determination from central banks to fight inflation at any cost will have damaging effects for economic activity, leading to further losses for credit assets.
Now is still the time, therefore, to maintain a high-quality credit portfolio with a cautious stance on duration but with appetite to gradually increase interest rate exposure as central banks start softening on interest rate hikes when inflation eventually abates.
‘Expect macro conditions in Asia to be stable in 2023’
William Lam, co-head of Asian and emerging markets equities, Invesco
Asian equity markets have not been immune to global macro headwinds, including rising interest rates, a strengthening US dollar and lingering recession risks. Geopolitics remain in focus as the Russia-Ukraine conflict and US-China tensions add to uncertainty.
However, domestic macro conditions in Asia should continue to remain stable in 2023, with inflation at more comfortable levels than in the US and Europe. Many countries in the region are at an earlier stage in their economic cycle, with rising incomes and consumer penetration a tailwind to structural demand.
The lack of visibility on how China may navigate away from its zero-Covid policy remains key, with additional concern over property market weakness.
Markets are currently pricing in a pessimistic outlook, but any roadmap for change would be positive for Chinese equities. We believe policymakers will come forward with a credible economic plan.
‘ETFs are vehicle of choice during market volatility’
Carolyn Weinberg, managing director, global head of product, iShares and Index Investments, Blackrock
As markets turned volatile and macroeconomic conditions became challenged, investors accelerated their adoption of bond ETFs – reinforcing our prediction that global bond ETF assets under management will triple to $5trn (£4.1trn) by 2030.
Bond ETFs are revolutionising fixed income investing by instantaneously providing access to hundreds of bonds at an actionable price.
In fact, during times of market volatility, bond ETFs are investors’ vehicle of choice, offering price discovery and the ability to nimbly transact portfolios of bonds to efficiently express investment views.
As investors build evolved portfolios by blending index bond ETFs with actively managed strategies, the increasing desire for liquidity, access, transparency and efficiency that bond ETFs provide will continue driving a more modern, electronic and transparent bond market.
‘We favour high-quality and short-duration assets’
Gurpreet Gill, macro strategist, fixed income and liquidity solutions, Goldman Sachs Asset Management
Until we reach a peak in policy hawkishness and recession risks, we favour high-quality and short-duration assets including investment-grade corporate bonds and agency mortgage-backed securities.
High-quality short-duration bonds can offer value against this backdrop, giving investors a chance to capture higher yields without undue interest rate or credit risk.
Finally, we believe there are opportunities in emerging market (EM) corporates, a large and diverse market that remains underinvested. EM corporate bonds offer higher yields over comparable developed market peers and can complement existing corporate or EM sovereign bond allocations.
‘Hedge funds: the perfect toolkit to improve returns’
Alec Slater, senior alternative investment analyst, Close Brothers Asset Management
Trend-following hedge funds have been capitalising on the perfect storm of macro, investor and policy capitulation this year. Price behaviour from industrial commodities mirrors the 2008 financial crisis: a global recession will result in an oil price crash during 2023, food price inflation is collapsing and supply constraints are disappearing.
Hedge funds have the perfect toolkit to improve risk-adjusted returns in portfolios with exposure to hundreds of markets including commodities. They will benefit from headline inflation coming down from double digits to zero and stock market lows in 2023 when Fed cuts become a consensus.
‘Once-in-a-generation buying opportunity’
Meera Hearnden, investment director, Parmenion
Never in my career have I witnessed such violent moves in fixed interest, with yields in 10-year gilts going from less than 1% a year ago to over 4% in a short space of time. Markets are simply adjusting from an era of very low interest rates to one with higher rates caused by higher inflation.
Politics has exacerbated the return and volatility profile of these assets. This has been painful for lower-risk investors but at the same time opened up opportunities in both government and corporate bonds.
Yields are incredibly attractive, and this could be a once in a generation long-term buying opportunity from current levels.
This article first appeared in the December edition of Portfolio Adviser Magazine
