JP Morgan Asset Management Global Bond Opportunities Fund Manager Nick Gartside explains where he’s finding the best fixed income ideas.
In his view, the economy faces two main risks: a lack of growth and a lack of inflation. Growth and inflation are the enemies of bond investors, so if Gartside is correct, the economic backdrop should be broadly supportive for bond returns in 2016.
But with fixed income indices locked into record low bond yields, Gartside is taking an unconstrained investment approach to generate returns and gain diversification.
Five of his current best ideas:
1) European High Yield: Gartside thinks it is a bright spot in the global credit universe as central bank liquidity and weaker currency act as powerful tailwinds. Europe is at an earlier point in its credit cycle when compared to other high yield markets, which supports return prospects, and the market has little exposure to the struggling energy sector.
Yields on European high yield may seem low relative to the US high yield market, but headline figures mask the US market’s lower average ratings quality, higher underlying risk-free yields, and longer weighted average duration vs. the European market.
Adjusted for these factors, credit spreads in Europe are actually cheaper than the US. European high yield continues to benefit from improving fundamentals, meaning that an already higher credit quality market is poised to deliver more rising stars – future investment grade companies that should deliver tighter spreads and higher prices.
2) Peripheral government bonds: Many peripheral European countries have gone through structural adjustments already and growth is spreading from central Europe, notes Gartside. Bouts of market volatility notwithstanding, spreads on Spanish and Italian sovereign debt can continue to grind tighter from current levels, offering attractive returns.