“UK GDP projections have been higher since initial post-Brexit estimates with 2017 GDP growth forecast at 1.8 per cent,” he says. “We believe this looks tough given the inflationary headwinds and declining credit impulse.
Therefore, he is favouring high-quality international defensives, especially pharma.
According to data from the Investment Association, the 146 funds in the IA Global Bond sector have held up pretty well, returning 8.1 per cent, 13 per cent and 25 per cent on average over the past one, three and five years respectively.
It should be noted this sector does contain funds investing in global government bonds, so some will be at the low end of the risk spectrum, while other fixed income funds are focusing just on high yield, so are at the opposite end of the risk spectrum.
The sector also has country or region-specific funds - such as the Aberdeen Euro Corporate Bond fund - and the Janus US Bond Fund - so a straight comparison of funds within the sector is not appropriate.
However, there are pockets of opportunity for fund managers wanting to go further up the risk spectrum to get good returns from fixed income funds.
Emerging market potential
Emerging market fund managers have made arguments about the wide terrain of stocks they cover. With corporate profits continuing to surge across some of the world’s most rapidly expanding countries, they claim that the scope to hike dividends, and lift share prices in the process, is huge.
Emerging market growth prospects have captured the attention of fixed income fund managers.
“Today we see opportunities in emerging market debt, for its diversification benefits, improving macroeconomic picture, and the fact that emerging market yields and spreads appear attractive relative to developed markets,” says Mr Iggo.
While this could increase the potential risk, there is the opportunity for managers to maintain a shorter duration to address some of that inherent volatility.
Mr Iggo adds: “If portfolio volatility is an important consideration, a short duration approach could be particularly appealing to mitigate the impact of rising interest rates.”
Paul Brain, leader of the fixed income team at Newton, is similarly keen on emerging markets. He currently favours sovereign and corporate bonds issued in countries where governments are introducing prudent structural reforms, citing Indonesia as an example.
“If governments resort to fiscal measures that support domestic companies through tax changes, this could be a benefit for some companies and improve their credit quality,” he says.
“Our strategy is actively seeking companies that could see their profits improve through preferential tax treatment.”
Japan
It's no secret that Japan's 10-year government bonds are operating at a 0 per cent interest rate but this has surprisingly attracted some fixed income managers.
