Stepping into the last quarter of the year, we remain positive on risk assets in the medium term. This might appear at odds with our view that the global economy is slowing.
Consumer activity is likely to slow as personal debts mount and the quality of employment wanes. Companies are continuing to take advantage of the low interest rate environment to maintain dividends and share buy-backs rather than invest in expansion or other capital expenditure, whilst banks face low profitability thanks to a flat and low yield curve. However, this weakness gives the Federal Reserve the room it needs to cut interest rates and we believe they will do so substantially over the coming months. This, combined with accommodative monetary policies and quantitative easing by other major central banks will continue to support both sovereign bonds and risky assets alike.
Moreover, on the geopolitical front, the likelihood of a resolution to trade tensions is creeping closer. We have long believed that a comprehensive agreement will be reached when president Trump's political ambitions are best served by that outcome. It seems to us that continued sabre-rattling has been accompanied by more conciliatory gestures, which could provide a further (and perhaps short-lived) flip for risk assets.
However, until the US Federal Reserve is more widely believed to be cutting rates aggressively, indicators of economic weakness are likely to cause volatility of the kind we have seen in the early days of October. It is for this reason that we have increased the fund's holdings of cash and short dated sovereign bonds.
Key allocations remain a long duration position in the US (some of it through call options on Treasuries to lend a less purely directional slant to that trade), Emerging markets, including hard currency Egypt sovereign and local currency Russia sovereign alongside our long-held India "Masala" bond exposures (also local currency).
We also continue to have exposure to subordinated bank debt, which should perform well in a curve steepening environment as the front ends of curves fall and the possibility for fiscal stimulus around the globe grows.
Richard "Dickie" Hodges is manager of the Nomura Global Dynamic Bond fund