Finding global hot spots for fixed income

This article is part of
Guide to finding yield in 2017

 Finding global hot spots for fixed income

Despite concerns over inflation and lower return expectations, managers believe there are opportunities for fixed income investors in 2017.

Darren Ruane, head of fixed income at Investec Wealth and Investment, believes strategies that might outperform include high yield and emerging market bonds, while some of the specialist sectors introduced over the past few years should remain attractive.

He says: "Inflation-linked and floating-rate funds and/or instruments should also be beneficiaries, but much of the good news is already in the price."

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George Efstathopoulos, multi-asset portfolio manager for Fidelity International, agrees floating-rate instruments could benefit from a rising inflation environment.

Overall, Adrian Lowcock, investment director for Architas, believes corporate and high-yield bonds with "low coupons" will provide some opportunities. 

"Investors can benefit from the potential to generate capital appreciation," he says, adding: "As the expectation for inflation begins to disappoint, there will be opportunities to make money further up the yield curve."

European bonds 

However, Mr Lowcock also believes the cheap-looking eurozone financials may seem like a bargain, but there are too many risks involved.

He adds: "Eurozone financials have looked cheap, although the risk has returned with the recent 'No' vote in Italy."

Rick Rezek, fixed income fund manager for Schroders, said the team "continues to largely avoid euro-denominated fixed income.

"All-in yields of less than 1 per cent, and spreads tighter than those in the US or UK are unappealing to us, and do not compensate investors for the risks."

Asia and emerging markets

But according to Mr Efstathopoulos, there are other global hotspots currently favoured by the team.

He comments: "We continue to like local currency emerging market debt. The recent volatility in emerging market currencies has reversed much of the gains we have seen in such currencies over 2016, but investors will still have benefited from the income over the year."

The manager believes there is now an opportunity to add more, but to do so on weakness and only "gradually". 

Another manager who likes the idea of emerging market bonds is Adrian Hull, senior fixed income product specialist at Kames Capital.

"Otherwise," Mr Efstathopoulos adds, "We would favour areas such as Asian investment-grade bonds, which offer a relatively attractive level of income from an investment grade perspective. 

"This is also a shorter duration market, so should be less sensitive to rising interest rates globally."

US bonds

Investec Wealth & Investment's Mr Ruane adds although bond yields may continue to trade within a yield range, some argue that now is a good time to re-introduce some interest rate duration, such as government bond-like bonds into portfolios.

He adds: "Although Donald Trump appears to have moved the game on in terms of fiscal stimulus and inflation expectations, forecasts may be overdone and investors too optimistic about the result.