Policy will dictate value in global fixed income

The US-China trade war, the rising US dollar and slowing Chinese growth largely set the economic backdrop of 2018, prompting Money Management to look at the performance of the global fixed income sector for the past year.

Anujeet Sareen, Brandwine global fixed income portfolio manager, deduced that policy, specifically a compromise in the global trade dispute, would dictate value in global bonds this year.

Sareen suggested that China, in conjunction with the emerging world, which has largely been caught in the intersection of a strong dollar, weakening Chinese demand, and the trade dispute, would trade places with the US, with the latter slowing as the former stabilises.

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“Self-preservation on both sides of the trade war argues for some kind of a deal, which should bring further relief to global markets in the form of a softer dollar,” he said.

The portfolio manager also said the outlook for developing economies and their respective financial markets would receive a huge boost should there be a soft landing in the global economy, an end to normalisation efforts in both the US and China, and a stabilisation in the dollar.

“Capital markets outside of the US have priced in a lot of bearish sentiment on the global economy, which has manifested in extreme discounts across a wide range of emerging market bonds and currencies, and commodities,” he said. “If policymakers react in the manner previously discussed, this shift should unlock significant value in these assets as the year progresses.”

From January 2018 to February 2019, GCI Diversified Income took the top spot in the global bond sector, returning 14.55 per cent. CFS US Short Duration High Yield sat in second position with 10.36 per cent returns, followed by CFS High Quality US High Yield and CFS US Select High Yield, with 9.60 per cent and 9.36 per cent returns respectively.

Colchester Emerging Markets Bond returned 7.87 per cent to comprise the top five, sitting well above the sector average of 2.22 per cent. Brandywine’s Global Fixed Income Trust returned 1.50 per cent, while Legg Mason’s Brandywine Global Opportunistic Fixed Income fund returned 0.96 per cent.

The chart below tracks the return of the top five global bond funds from 1 January 2018 to 1 February 2019 as compared to the sector average.

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