Global credit markets source of returns in 2014, AAM’s Boulind says

Aberdeen Asset Management’s head of Global Credit Oliver Boulind believes that global credit markets remain undervalued and are an important source of potential returns in 2014.

We are confident that credit valuations will improve in 2014, but there is likely to be volatility not least because of the US Federal Reserve’s decision to taper its asset purchasing programme. We think investors should be looking at strategic alternatives when trying to capture these potential gains while mitigating risk.

Boulind identified four factors driving the outlook for credit markets:

1) Economic growth: “We forecast a gradual acceleration in the US recovery, sustained positive expansion in Europe, more progress in Japan and greater stability in emerging markets – particularly China – which we believe will meet its growth and reform targets in 2014.”
2) Corporate fundamentals: “Companies are continuing to post high levels of profitability, lower capital expenditures than history would suggest and demonstrate surprisingly conservative company management especially in Europe.”
3) Default rates: “Gradually accelerating global economic growth and abundant central bank liquidity will keep default rates low. Economic growth will enable companies to grow into their balance sheets and help management recover from shocks and bad decisions. Excess liquidity will enable companies to better manage their balance sheets, and help weak companies remain solvent.”
4) Valuations: “Yield spreads remain significantly higher than their historical lows and currently overcompensate for default and downgrade risk. We see this continuing into 2014.

Central bank easing policies over the past five years have dramatically affected valuations for many markets today. Accelerating economic growth in the UK, the US and Europe show that these policies have finally begun to work. We think the central question now is how will all of these easing policies be unwound? Heading into 2014, we believe investors’ greater concern should be centred around interest rate risk and not credit risk. In other words bond investors should position themselves to take advantage of improving economies and stronger companies while avoiding unnecessary – and uncompensated – government bond risk.

A strategic bond mandate allows the portfolio manager to make an allocation across credit and quasi-credit markets but also to government bonds or cash-like instruments when the economic and market cycles eventually turn again. The global opportunity universe is more diverse, enabling the income downside to be limited in a rising yield environment, while offering superior quality returns throughout the cycle. Investors can take advantage of these global opportunities in a strategy fully hedged to sterling such as the Aberdeen World Strategic Bond Fund.

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