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Can fixed income confound expectations in 2014?

by Robert St George on Jan 13, 2014 at 13:57

He argues: ‘With inflation well contained in most of the major markets, today presents an opportune time to begin building inflation hedges, with markets pricing a subdued outlook. These bonds can also be a useful tool to mitigate against the risk of rising rates.’

Finally, he opts for another often overlooked part of the market: Chinese renminbi-denominated debt, also known as dim sum bonds. ‘This asset class has annualised volatility of around 3%, which is around a third of that experienced in emerging market local currency bond indices, but offers yields in excess of 4%,’ he said.

‘This is an attractive proposition given its modest investment grade credit risk, low interest rate duration and potential to capitalise on a modest upward appreciation of the Chinese currency. Dim sum bonds proved much more resilient through the summer of this year and we expect another steady performance from these bonds in 2014, especially in light of recent reform announcements.’

Thomas Becket, Psigma Investment Management’s chief investment officer, takes a more broadly positive position on Asian fixed income, tipping the Aberdeen Asian Local Currency Short Duration Bond fund in particular.

‘There have been two things to avoid in 2013: sovereign bonds and emerging market currencies. The fund invests in both and produced a mildly negative return last year. However, we believe that the future might be better and now could be the time to back emerging market currencies,’ he said.

‘There is extreme negativity around the short term outlook for emerging market FX, but with many of the Asian economies stabilising we expect better performance in 2014. Given the strength that the pound has enjoyed in recent months there are reasons to expect some of the shine to come off sterling this year, particularly if investors worry about the fact that consumption through debt creation is the primary driver for the UK economy. Asian economies do not have that problem and will surely gain against the pound over the coming years.’

A naysayer on this point, though, is Jim Leaviss, M&G’s head of retail fixed interest.

‘We think that regardless of which reform path Beijing takes, more corporate defaults, rising non-performing loans, and some degree of a credit crunch are unavoidable over the next three years.’ He adds that this could provoke a depreciation of up to 10% depreciation in Asian currencies.

Elsewhere in emerging market bonds, Enzo Puntillo, manager of the JB Total Return Bond fund, favours snapping up securities whose prices have been depressed by macro fears.

He suggests Brazil, for example, where the bond market has corrected by 3-5 percentage points and now offers ‘outstanding’ 12-13% yields.

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  • William H Gross
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