JP Morgan AM’s Iain Stealey looks for life in fixed income, as a retracement beckons

Iain Stealey, portfolio manager on the JP Morgan Asset Management Global Multi-Sector Income Strategy, says he feels the sideways movement of the market in February is a pause, with liquidity on the sidelines set to be invested.

As we approach the glitz and glamour of the Oscars this weekend, where the adaptation of the novel ‘Life of Pi’ is looking to take home the prestigious award of best picture, the recent ‘Life of Fi’ (fixed income) and financial markets in general has been far less exciting.

In contrast to January, where riskier assets had buoyant performance with global equities returning over 5%, high yield bonds rallying and core government bonds selling off, February has been a month of frustration for investors as the momentum has been lost and markets have moved sideways. Since the start of the month, core government bond yields have been stuck in very narrow ranges, high yield bonds have flat lined and equities have only managed to eke out small gains. Given the extent of the moves witnessed in the second half of 2012 and the first few weeks of 2013, it was to be expected that markets would at some point need to consolidate. The question now is if this is just a pause before financial assets restart their march higher or the beginning of a retracement?

Our sense is that it is a pause before risk assets continue their upward move into the second quarter of the year. We remain in a sweet spot for markets, the tail risks that were hanging over the world last year have been reduced, yet global growth and inflation are set to remain low allowing central banks to keep monetary policy accommodative in an attempt to stimulate economies. With the threat of higher interest rates unlikely to materialize anytime soon and an abundance of liquidity on the sideline looking to get invested, areas of fixed income like high yield and emerging markets still offer compelling valuation and are likely to rejoin the red carpet parade.

 

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