Investing in fixed income: Where to be cautious and where to buy
As multi-asset investors focused on income generation, we do not think going against global central banks is prudent, and until we see a meaningful turnaround in economic data, our preference for adding to risk is likely to remain for debt over equity securities which we have continued to reduce our exposure to.
We are still seeing attractive valuations in credit markets despite policy-driven spread tightening in recent months, even in corporates with strong balance sheets and cashflows in the US markets.
However, we think some of the best opportunities are presenting themselves in Asian markets, and have recently been increasing our exposure to Chinese government bonds, emerging market hard currency debt and Asia high yield.
Chinese government bonds showed their defensive qualities during the worst of the selloff in March, while offering an attractive yield pickup over developed market government bonds.
Uncertainty prevails: Attractive valuations exist but the risk of defaults is high
In addition, tailwinds from index inclusion are only set to continue building throughout the rest of the year, and we see the recent rise in yields as an opportunity to add to more attractive nominal and real yields.
In the emerging market debt (EMD) space, our preference is for dollar-denominated debt given attractive valuations, defensiveness relative to local currency EMD, and more upside participation in oil markets given the universe's shift in recent years to include a higher allocation to oil exporting countries.
We think caution is needed on local currency debt, as the institutional capacity to provide stimulus, keep rates low, and avoid capital flight varies greatly by country.
Asia high yield also remains an attractive proposition. Asian companies have reduced debt on their balance sheets and can further benefit from supportive funding conditions, and valuations still provide adequate compensation for credit risk.
In addition, technicals are supportive, and the Asia high yield universe is more domestic focused and offers some insulation against any sustained trade war resurgence.
George Efstathopoulos is co-portfolio manager of the Fidelity Multi Asset Income fund
Bull Points
• 'Don't fight the Fed' or other central banks
• Look to Asian debt markets for attractive opportunities
Bear Points
• Our preference for adding to risk is biased towards debt over equity securities
• Caution is needed on local currency emerging markets debt
