Yield levels are also an indicator of demand issues, so what changes do you see in demand for different types of credit, IG, HY, true junk, if interest rate differentials open up further between developed markets, but also demand for EM corporate bonds as well as EM sovereigns?
“We are positive on demand for emerging markets fixed income going forward. This constructive view is based on the fact that crossover investor positioning is light across local rates, hard currency debt, and currencies. In addition, since spring 2013, fund flows into the asset class have been negative, particularly during the second half of this year. Elevated risk premia in emerging markets fixed income now make the asset class attractive for many investors from a valuation perspective.”
“That said, many are reluctant to increase their exposure here as the implications of the expected Fed hiking cycle are hard to predict after multiple years of unorthodox monetary easing. Also, the medium term consequences of the rebalancing and slow-down of the Chinese economy are difficult to assess. More clarity coming from both sides in the coming months will help to shift the sentiment more positively, in our opinion. We see both developments as normalisation and expect no hard landing in China nor any sharp repricing of the Treasury curve.”
How well will fixed income fare generally versus equities or alternative asset classes over the coming year in your opinion?
“In an environment of monetary policy normalisation starting in the US, historically low policy rates offer limited scope for capital appreciation and total return in developed markets sovereign debt. That said, within the fixed income space, there are markets with elevated risk premia and sound fundamentals that offer attractive opportunities, in our opinion.”
“This framework results in our positive view on parts of the asset class as the risk premia are currently wide, particularly for emerging local rates and FX. Equities should also benefit from risk premia compression, despite the fact that sluggish growth has a negative impact on companies’ revenues.”
Are you adopting any particularly relevant risk on or risk off bets for the coming year?
“Rogge Global Partners is a fundamentally-driven investor and we believe that sustainable superior returns can be achieved by investing in healthy and fundamentally improving countries and entities. Whilst we are aware that risk sentiment is an important driver for asset class performance, we would not implement pure ‘risk-on’ or ‘risk-off’ strategies, which would neglect the underlying fundamental health of the issuer.”
“With respect to emerging markets, we expect the risk sentiment for the asset class to improve and, therefore, seek to invest in countries and markets we fundamentally like and that offer a generous risk premium. Also, even with a benign global growth outlook, we believe that commodity and energy prices have already reacted significantly to the deterioration in growth momentum, particularly in China. Stabilization here will benefit commodity exporters. Investing in commodity exporters would be classified by some investors as a “risk-on” strategy, but we would rather emphasise the fundamental angle, as the terms of trade and growth impact is the main underlying driver.”
Who or what type of client do you tend to have in the fixed income space, and do you foresee a need to be able to offer radically different solutions to them through the coming year, depending on how the macro and micro environments develop?
“Rogge manages fixed income portfolios on behalf of institutional investors, such as pension funds, sovereign wealth entities and insurance companies, as well as wealth managers. In the coming years, we believe that global fixed income will remain a core part of institutional investors’ strategic allocation, even in an environment of interest rate normalisation. Clients will need to invest in fixed income for both liability matching purposes and return seeking objectives. The macro and micro environments require us to navigate inflection points with cutting edge risk management and focus on relative value opportunities. Some of our clients are moving towards opportunistic fixed income strategies that aim to provide excess return over a cash rate, but we believe there will still be an appetite for traditional, benchmark relative strategies.”