J.P. Morgan Asset Management: First Rates
After what had been a relatively tame 2014, in October volatility made its grand return to fixed-income markets. And with this latest uncertainty comes fresh opportunity to take a look at bonds. The overall lack of market liquidity, however, means that “you have to be an investor again, not a trader,” writes Bob Michele of J.P. Morgan Asset Management. “We have to do our research, have conviction behind the securities and strategies that go into our portfolios and be willing to live through a bit of volatility.” In his view, the Federal Reserve is likely to remain at least somewhat accommodative for another three years or so, and there’s good value to be found in U.S. and European high-yield and in emerging-markets bonds — especially in Eastern European countries whose economies rely heavily on manufacturing and have manageable current-account balances. “The best returns over the coming year are going to be for managers who are invested, have yield in the portfolio and have some carry,” Michele writes. “The party won’t end until the Fed takes away the punch bowl.”
AllianceBernstein: Fear Not
What do you get when you combine hard-hitting analysis of the present fixed-income market with a World War II–era motivational slogan turned 21st-century Internet meme? Drawing from the case laid out by Douglas Peebles at AllianceBernstein, you’d get the catchphrase “Keep calm and carry bonds” — global bonds, specifically. “Global bonds have offered historical returns comparable to domestic ones — and with considerably lower volatility,” he writes. “What’s more, varied global exposure offers investors diversification of interest rate and economic risk.” Over a 20-year period spanning from 1994 to 2013, among three different bond strategies — a hedged and an unhedged global approach and a U.S.-only one — the hedged global strategy offered the lowest volatility and the highest risk-adjusted returns. “We understand that these are tense times for investors,” Peebles writes. “But fear can be a great catalyst. And when it comes to bonds, this may be a perfect time for investors to go global.”
Investec Asset Management: Quiet Strength
Another trend to emerge in the global markets this autumn has been the strengthening of the U.S. dollar. Typically, when the dollar, a global reserve currency, starts trading higher on foreign-exchange markets, emerging-markets economies and assets tend to buckle. But if the recovery from the 2008–’09 financial crisis has taught us anything, it’s to expect the unexpected. “The rate-hiking cycle in the U.S. may look quite different this time,” writes Mike Hugman of Investec Asset Management. “Other large developed economies such as Europe and Japan may be easing as the U.S. tightens. And most important, many emerging markets have transformed themselves in a number of important ways over the 15 years since the U.S. dollar last rallied.” Developing economies that have taken on notable reforms and have upped their productivity are likely to see stronger bond and credit returns and a less flappable exchange rate.
BlackRock: Let it Go
Yes, volatility has returned and investors seem finally to be showing wariness of geopolitical risks and the sustainability of economic growth. But, , there are several positive secular factors at work in the U.S. economy, which put the country on a faster path to economic expansion compared with Europe. Citing recent strong U.S. employment and GDP data, Rieder notes, “We at BlackRock continue to think that maintaining monetary policy accommodation at so-called emergency levels appears both unnecessary and potentially disruptive to the proper functioning of financial markets.” • •
Read more from this series at institutionalinvestor.com/gmtl.