Bond market investors should not be distracted by populism
Political risks and volatility in the markets are expected to pose both opportunities and challenges for the bond market, according to AllianceBernstein (AB).
The asset manager said that investors with appropriate risk profile strategy would have a number of opportunities to achieve worthwhile risk-adjusted returns in the coming year, despite the potential market volatility.
However, AB dynamic global fixed income fund's portfolio manager, John Taylor, warned investors against putting too much focus on the events related to a surge in populism, which was gaining momentum particularly in Europe where populist politicians were expected to perform well in the upcoming elections.
"It's important that investors don't allow themselves to be unduly distracted by such events. There are plenty of other factors and trends in fixed-income markets which are quite well established and which need to be considered carefully, both as risks and as potential opportunities," he said.
These factors included high levels of debt, among governments, improving global growth, continuing monetary-policy divergence between countries, and fiscal stimulus in some countries.
In order to better position their strategy to benefit from current market conditions, investors should also:
- Be less sensitive to interest-rate risk;
- Show more flexibility to take advantage of improved bond valuations as developed-market yields rise;
- Have exposure to emerging markets, in particular in countries where the inflation is expected to fall this year;
- Be more selective as far as corporate bonds are concerned, particularly in the US where they are expected to benefit from an improved growth outlook;
- Consider a reappraisal of the banking sector which is expected to become more attractive; and
- Be prepared to sell out of corporate bond sectors where valuations look tight.
"With uncertainty about how much of president Trump's policy agenda will become law, continuing concerns about China's economic growth, the persistent global debt hangover and mixture of conventional and unconventional monetary policies, investors have much to think about," Taylor said.
"But that shouldn't mean they disengage from the market-providing they have the right financial advice and active, diverse, and well-researched investment strategy."
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