Everything went up in February, government bonds, credit, high yield, equities, gold, oil – all rose. There was justification for some of this – economic data was supportive of risk assets and the new US administration is still promising a raft of measures that may support corporate earnings (at least in the short term). Politics in the US and Europe will continue to dominate the news agenda in the months to come, but the actions of the Federal Reserve and ECB will weigh heavily on markets.
Strategy & Positioning
For some time, we have been positioning for rate rises at the end of 2016 and the potential for further rate rises in 2017. If anything, the Trump victory, with its (perceived) consequences for inflation, reinforces the case for the Fed to hike rates.
Risky assets have already priced in a great deal of stimulus but we believe the risk rally may have further to run. Against this, we have to consider valuations, which look poor across many asset classes. There is clearly the risk of a lurch towards more extreme politics across the European Union, with elections in major markets in 2017 and beyond. This has been reflected in sovereign bond yields, which have tightened recently and look unattractive in many cases.
We continue to believe that some areas of the credit market offer opportunities, whereas others harbour risks. The heavy oil exposure within the US high yield sector is of concern, whereas convertible bonds issued by Japanese companies offer significant potential upside in some cases. We continue to be selective and will back those selections with conviction.
Overall, the fund continues to have cash to deploy, and has a degree of hedging in place to counter further downside volatility. The level of hedging employed is now significant, and we do not anticipate adding to it in the near future.
Richard “Dickie” Hodges is manager of the Nomura Global Dynamic Bond Fund