As for fixed income, BlueBay Asset Management’s head of credit, David Riley, notes that higher yielding emerging market local currency corporate and sovereign bonds are appealing because investors can receive an extra boost from the credit risk premia.
“We also like European and US convertible bonds in our multi-credit portfolios because they are hybrids and offer some of the equity upside when equity markets outperform,” he adds.
“Other interesting sectors are leveraged loans that are floating rate and offer protection against rising rates as well as direct lending and long/short absolute return bond funds where the return profile is set against cash plus 200 basis points to 300 basis points.” Travis Spence, managing director and head of JP Morgan Asset Management’s fixed income EMEA client portfolio management team, also advises being in spread sectors that offer a cushion against rising rates. “This includes high-yield bonds and investment grade corporate bonds which have performed well and even though spreads are nearing the tight end of their historical ranges, there are still very strong supply/demand dynamics against an environment of slow global rate rises and QE.
“In this environment, we also see value in selected local emerging market debt not only because of the returns but also the currency appreciation,” Spence adds. “Another area we are seeing interest in is the European AT1, or contingent convertibles (CoCos), market. However, security selection is very important because you want to ensure that you are being compensated for the risk you are taking.”
CoCos are at the riskier end of the preferred securities market because in an ideal world they act like normal bonds and pay out a coupon. However, if a certain pre-defined event happens – typically a drop in the bank’s capital ratio below the minimum level demanded by regulators – then owners lose their stake and the debt becomes equity and investors are faced with a long drawn out process of restructuring.
Antoine Lesne, head of ETF strategy and research for EMEA at SPDR, State Street Global Advisors, also thinks investors should focus more on the shape of the curve and strategies where the carry roll down (which involves selling bonds before they mature in an attempt to profit from rising prices) is positive. In bond markets, prices rise when yields fall, which is what tends to happen when curves are steep.
This is interesting in the intermediate part of the euro corporate investment grade market in particular.
Other defensive plays, according to Aviva Investor’s Tom Wells, are US and Australian government bonds. “I still think they have a role to play not only because of returns but they will pay out when markets are distressed,” he says. “We also like US Treasury Inflation Protected Securities because again there is value but they also offer protection against inflation which in the US is fast approaching the Fed’s target of 2%.”
Cash is also an option for some. “We are holding more cash due to the lack of opportunities, but we do not make changes that are short term in nature,” says Dan Kemp, chief investment officer of Morningstar Investment Management Europe. “We will be changing our cash weighting in line with the number/scale of the available opportunities changes,” he adds. “The timing of these changes is unpredictable. To call them short term suggests that we are trying to trade the market or make predictions, neither of which we do.”
