Global economic conditions have increased the prospect of good returns from fixed-interest investments, but active portfolio management will still be required.
The outlook for the fixed-interest market in 2025 is generally positive, but actively managed strategies that select between different regions and industries will still need to be chosen to benefit from the situation, according to a global investment manager.
Janus Henderson Investors head of Australian fixed interest Jay Sivapalan said the optimistic view comes from a combination of more governments formulating accommodative economic policies and strong underlying fundamentals in the fixed-interest sector.
“Whilst global economies were late cycle with restrictive monetary policy, they have weathered this well. In spite of the recent economic environment being much slower growing than during the pandemic policy-boosted era, labour markets remain resilient and corporate defaults are at only moderate levels,” Sivapalan said.
“We have witnessed a noticeable slowdown only within particular areas, such as highly leveraged sectors, consumer discretionary, property development and small-to-medium enterprises.
“The results have been uneven across economies, with the US faring materially better than regions such as Europe and China, and with elevated defaults occurring in specific regions and sectors, whilst others have thrived and still exhibiting historically low defaults.”
He said risks remain given the cost of capital remains high, despite the easing cycle taking place across the globe, and as such cash rates and bond yields are unlikely to fall to the levels seen during the COVID-19 pandemic.
“The cost of capital, as well as its availability, has changed for the better from an allocation perspective. This will continue to challenge certain over-levered industries as the recent past restrictive policy continues to work through economies,” he said.
“Monetary policy has long and variable lags having an adverse impact even after central banks progress their current easing cycle. Perhaps not as well assessed is the leverage governments carry, especially when fiscally challenged, even including the US and their privileged Treasury bond market.”
As a result of these market conditions, he said active positions should be taken in different fixed-income sectors and his firm was currently overweight in the area of duration and yield-curve investments selection, particularly in short to mid-term-maturity investments that were sensitive to the near-term cash-rate cycle.
“In sector allocation and selection, [we are] currently pursuing unfavoured areas, such as semi-government bonds, senior debt of Australian real estate investment trusts, university debt, utilities and infrastructure that are necessary for the energy transition,” he said.
“In higher-yielding sectors, [we are] defensively positioned for now, recognising the elevated defaults in certain pockets with minimal compensation, but remaining selective in certain areas such as loans where repricing has occurred.”
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