David Absolon, investment director at Heartwood Investment Management, discusses Heartwood’s outlook on fixed income for 2016.
In many ways, Heartwood’s cautious fixed income view was challenged through the course of 2015 as they looked towards a market environment that would begin to respond to a new era of Federal Reserve tightening, albeit a slower and shallower trajectory of rate hikes. However, US growth disappointed in a weather-related blip in the first quarter and, more significantly, midway through 2015 on slowing emerging markets growth and a strong US dollar. Some of these concerns are now dissipating, as Heartwood says it anticipated.
Key points from the outlook include:
The US economy to retain its role as the engine of global growth in 2016;
The Federal Reserve to proceed on a very gradual tightening path as rising wage momentum feeds into inflation;
Global central bank divergence is likely to be a dominant theme. The Bank of England will be keen to follow the Fed’s lead of beginning the path of rate rises, but the ECB and Bank of Japan will continue with their quantitative easing programmes;
Developed sovereign bond yields are expected to rise moderately and we may see steeper curves;
Investors should expect lower returns across credit markets, although select valuation opportunities are available for fundamental investors.
Heartwood says it continues to believe it is prudent to maintain a short duration profile in fixed income, holding exposure to shorter-dated bonds and constraining their market weight to this asset class. While it says its duration view remains consistent, its credit view has evolved to reflect shifting dynamics. Heartwood believes there are select valuation opportunities in this market, but that there will be fewer opportunities across the broader credit universe than in 2015, as fundamentals weaken on the evidence of shareholder-friendly behaviour and higher debt burdens among corporates.