With market commentators rallying investors to “bring on bonds”, which sectors or markets should investors be looking at? We bring together some ideas from fund houses.
Singapore bonds: A low risk diversifier amid uncertainty
Eastspring Investments (Jan 2023)
“The SGD (Singapore dollar) bond market, which is one of the most advanced in the Asian region, has proven to be a reliable income source and an effective portfolio diversifier. Furthermore, the healthy credit profiles of Singapore companies, attractive yields, and the country’s triple-A sovereign credit rating have been drawing investors to this market.”
China: will a loosening of zero-Covid provide a spark?
Schroders (1 Dec 2022)
“The outperformance of Chinese onshore bonds so far this year, as well as during the pandemic in March 2020 and in 2021, demonstrates the asset class’s resilience and diversification benefits. Indeed, international investors increasingly perceive it as something of a safe haven.”
“Going into 2023, the outlook for Chinese onshore bonds looks positive, especially if US dollar strength reverses.”
Emerging-market local currency yields offer protection in volatile conditions
Capital Group (30 Nov 2022)
“The global backdrop remains a key headwind for EM debt, and volatility is likely to persist in 2023. That said, valuations have markedly improved and EM debt now seems to be pricing in known risks and, as such, could offer attractive return potential for research-based, long-term investors. We see opportunities in select higher yielding hard currency sovereign and corporate bonds, as well as in certain local currency countries that have been proactive in their monetary policy responses.”
The markets vs. the Fed
Franklin Templeton (19 Dec 2022)
“We are cautious on US Treasuries (USTs), because markets seem to be pricing in what would be a significant reversal of rate hikes already in 2023, which we do not see as plausible. Opportunities should appear sooner on eurozone government bonds, as valuations appear attractive and European Central Bank (ECB) hawkishness should peak soon.”
“The slowdown in economic growth that we forecast should place more pressure on corporates and cause credit spreads to widen further from current levels. Consequently, we still prefer to move up in quality on US investment-grade (IG) issuers; we are also cautious on US high-yield (HY) issuers, although here, we see very interesting longer-term prospects given already attractive yields and favourable technical conditions. We are more bullish on European IG corporates, given strong fundamentals, with a bias to higher-quality credits; and on European HY corporates, given the attractive carry.”
“Other sectors that have been strongly challenged in 2022 — like municipal bonds, emerging market (EM) sovereign debt and EM corporates — will present attractive opportunities as the monetary tightening cycle matures.”
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It is impossible to predict how macro events such as this would play out, or to prepare for any consequent implications on your investments. However, spreading your investments across asset classes and geographies will help with diversifying your risk. With market volatility comes opportunities. If you have a long-term investing horizon, as many of us do, these developments may offer an opportunity through steady, regular investing in diversified and risk-adjusted portfolios.
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Read more: Bonds are back (Part I) — why market commentators are seeing a strong case for investing in bonds
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