Finding global hot spots for fixed income

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."

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.

We would favour areas such as Asian investment-grade bonds, which offer a relatively attractive level of income. George Efstathopoulos

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.

"Certainly, the idea we can move from a global economy that has been mired in slow growth and muted inflation into one that receives a sharp boost to both factors seems unlikely."

Mr Hull believes Mr Trump's economic policies are something to watch.

Although some areas - such as emerging markets - are "reeling" from Mr Trump's victory, Mr Hull thinks high-yield markets have the potential to benefit from the policies being set in place by the new president.

Moreover, Mr Hull adds that risk-free markets - government markets - will have "moments of opportunities" as they grapple contrary policies of a fiscally lax Trump administration, against the structural and deflationary problems of US and Japan.

UK

Some managers are expressing caution about the UK, such as Kames Capital's Vincent McEntegart.

He states: "It is clear to us investors seeking income need to look beyond UK assets in 2017, with the opportunities to capture a decent level of income from traditional UK assets limited."

However, Mr Rezek believes the UK cannot be overlooked, as the sterling credit market performed well in 2016, despite the uncertainty surrounding Brexit and the fact that the negotiation process is "likely to be fraught with challenges for both sides of the bargaining table".

Mr Rezek says: "We think further opportunities could emerge in the sterling credit market in 2017."

Diversification 

Not every respondent to this guide thought there were "hotspots" in fixed income - or in any particular asset class.

Patrick Connolly, certified financial planner for Chase de Vere, comments: "Rather than try to pick the next top-performing investment, the best approach is usually to hold a balanced and diversified portfolio to generate income and spread risks."

According to Mr McEntegart, diversification will be "key", both in terms of asset selection and geographical reach.

He adds: "There are opportunities from assets such as property companies and alternative assets, alongside equities and bonds."

Mr Rezek adds: "Volatility will be the rule rather than the exception in 2017."

simoney.kyriakou@ft.com