Q Investors have been expecting the US Federal Reserve (Fed) to cut interest rates since late 2023. What is your outlook for rates, and how are you positioning your income strategy in terms of duration and sub sectors?
We reduced duration in late 2023, given how much easing was already priced into bond markets. Since then, both growth and inflation have surprised on the upside.
The consensus has shifted to a ‘soft landing’ with lower inflation. This should give central banks globally some room to cut rates – eventually. There is even some risk of ‘no landing’.
The upshot for income strategies, with markets priced for limited risks, we see increasing value in government bonds at current yields. By contrast, the risk premia offered by growth sensitive assets such as equities and high yield corporate bonds have collapsed, so we prefer stocks in more defensive sectors and dislike expensive corporate names.
With this sentiment in mind, call options are an increasingly attractive way to capture any further potential upside in more cyclical growth equities and tech names, while avoiding downside risks if they begin to run out of steam.
Q With Fed rates likely to remain higher for longer, do you expect other regions to ease monetary policy? How can investors capture the investment opportunity this creates?
We see scope for some markets – such as the UK, New Zealand and Australia – to decouple from the US and cut rates even if the Fed is slow to do so. Emerging markets (EM) also potentially offer better value generally, with pricing already more pessimistic.
More broadly, numerous risks to the consensus might drive risk premia higher. Despite stronger post-pandemic corporate balance sheets, signs of stress are apparent in the form of weaker borrowers, smaller businesses and lower income consumers. Investors shouldn’t be surprised to see a rise in defaults relative to hopeful market expectations.
Should such events unfold, the scope for larger rate cuts than the market currently expects will likely increase. In turn, higher quality fixed income could deliver attractive returns.
Q What income-generating assets are attractive if the Fed cuts rates sooner rather than later?
Our exposure to income-generating assets like government bonds stands to benefit if the Fed cuts rates sooner than the market expects.
How other assets perform may depend on what drives the cuts. If the trigger is falling inflation, holdings in resilient yielding equities and equity call options should do well as growth holds up and policy eases. If the reason for cuts is more malign, reflecting weaker growth, we expect corporate bonds and cyclical equities to struggle.
Elsewhere, Fed cuts are likely to reduce support for the US dollar, accelerating rate-cutting in other markets. This will potentially benefit our holdings across a broad range of developed and emerging bond markets. Also, our modest exposure in cheaper yielding EM equities should do well.
This dynamic backdrop and uncertainty reinforce the importance of a nimble strategy with clear objectives and investment approaches backed by strong risk management disciplines. Ninety One Global Managed Income Fund is therefore well-placed to navigate volatile markets and manage the downside, as well as seek an attractive income-driven return.
Source: Ninety One, 30 June 2024.
Disclaimers: Ninety One Global Managed Income Fund is a sub-fund of Ninety One Global Strategy Fund. Past performance figures shown are not indicative of future performance. Investment involves risks. Please refer to the offering documents for further details, including the risk factors. The portfolio may change significantly over a short period of time. The income generated by the underlying securities held by the Fund might not necessarily represent income distributed by the Fund. The actual income distributed by the Fund may be affected by various factors. Any opinions stated are honestly held but are not guaranteed and should not be relied upon. This material is provided for general information only. It is not an invitation to make an investment nor does it constitute an offer for sale. The full documentation that should be considered before making an investment, including the Prospectus and Product Key Facts Statement (KFS), which set out the fund specific risks, is available from Ninety One. In Hong Kong, this material has not been reviewed by the Securities and Futures Commission (SFC). Issued by Ninety One Hong Kong Limited.
