Opportunities within the fixed income asset class will see a strategic approach to investing remain popular among investors in the New Year.
Fidelity’s fixed income investment solutions and real estate chief investment officer, Andrew Wells, said bond funds with the flexibility to allocate across bond categories and tactically tilt to the most attractive areas are well positioned to provide an attractive risk-adjusted return to investors.
Market volatility will also continue to sway investors to retain preference for lower-volatility assets.
“For those willing to take on a little more risk in search of higher real yields, emerging market bonds are attractive, particularly as currency appreciation could enhance returns,” Mr Wells said.
“While the idea of a bond bubble has become a subject of debate due to the strength of the flows into fixed income, I see little scope for a reversal in the fundamental attractions of the asset class given the likelihood of a low-growth environment in which central banks are committed to easy monetary policy.”
Fidelity said that while the company continues to see some value in high-yield markets, investors should focus on the high quality end of the market.
“Investors should also be realistic about prospects for 2013 – the exceptional returns of recent years will not be repeated,” Mr Wells said.
“We can expect high-yield bonds to offer attractive positive carry rather than strong capital appreciation prospects, and we’re likely to see returns in the high single digits rather than the double digits,’ he said.
Emerging market debt is also expected to remain attractive over the next year given the prospect of capital flowing to higher-yielding currencies.
“There is a strong correlation between emerging market purchasing managers’ indices and emerging market foreign exchange,” he said. “If we see a gradual global recovery taking shape, we should expect to see a pick-up in emerging market foreign exchange returns.
“The next leg of this rally though will not necessarily be in hard currency bonds; it is likely to be in corporate bonds and local currency issues.”
Fidelity also warned that when heading towards the end of 2013, investors should be wary of inflation risk and adopt an inflation-hedging strategy.
“Protected strategies [will be] attractive, but the caveat is these bonds typically perform better in a higher growth environment and the longer duration structure of many developed market issues introduces undesirable interest rate risk,” Mr Wells said.
“A better inflation-hedging strategy may be to increase exposure to emerging market inflation-linked bonds, which are supported by higher economic growth rates; these bonds would be well placed to perform well if the global economy strengthens.”
