Insight Investment unpacks how fixed income is presenting investors with opportunities to lock in long-term equity type returns.
While fixed income markets previously struggled amid persistent inflation, the asset manager holds a constructive outlook on the asset class in the face of possible interest rate cuts.
April LaRusse, head of investment specialists at Insight Investment, unpacked: “While expectations for interest rate cuts by major central banks had been high entering the year, fixed income markets have been struggling against a backdrop of inflation not coming down as quickly as anticipated and economic activity remaining resilient.
“In an environment of lower policy rates and lower yields in the months to come, investors will get a tailwind of having a degree of structural exposure to interest rate duration, or interest rate sensitivity, boosting returns.”
The firm currently holds a constructive outlook on fixed income and credit for two reasons, the product specialist described.
“Firstly, the positive macroeconomic backdrop where we see growth stabilising or improving, inflation falling back towards central banks’ targets, albeit on a bumpier path, and monetary policy likely being easier rather than tighter going forward. This creates a supportive backdrop for risk assets.
“Secondly, yields are back at pre-GFC levels after having been suppressed by loose central bank policy for an extended period of time. Credit markets now offer yields comparable to or even in excess of long-term returns of the MSCI World Index.”
The combination of the two factors presents an opportunity, Insight said, for investors to lock in equity type returns for the long term through fixed income assets.
Given the current income available, she observed the asset allocation shift occurring as investors close out underweights to fixed income and lock in income-based returns.
LaRusse continued: “We are expecting government bond yields in the US and Europe to fall over the next 12 months, and we are constructive on credit where yields are historically attractive while defaults remain low.
“Within credit we prefer EUR investment grade over USD investment grade credit on the back of relatively more attractive valuations, while we are more cautious on high yield where the higher cost of capital exerts greater pressure on leveraged capital structures. Within emerging markets, we prefer sovereign high yield and local currency debt.”
