Applying the “three lines of defense” in multi-asset income
Facing volatile markets and lower rates, how can investors seek yield while managing risk?
Investors are entering 2019 with an expectation that the US Federal Reserve is looking likely to raise its benchmark interest rate two more times this year. While the four rate hikes in 2018 had been challenging for fixed income assets, we expect fixed income performance to improve in 2019.
In the current low but rising interest rate environment, global growth momentum is moderating but remains positive. A strong job market and relatively healthy household balance sheets are supporting US consumers. Relatively low corporate financing costs and strong profits are helping to sustain US capital expenditure growth.
When the global economy moves deeper into the late cycle, the bouts of market volatility from heightened trade tensions and monetary policy normalisation suggest that investors may want to focus more on the search of income than on purely capital gains.
Having said that, being predominantly risk-off could be a bad idea as this tends to be detrimental to returns. A slow rotation from an aggressive portfolio to a more defensive portfolio is likely the more suitable answer. A common defensive move to consider is a greater investment weighting in fixed income.
While the current global growth momentum continues to benefit some of these fixed income assets, investors should still adopt a more agile approach with the flexibility to diversify across different fixed income asset classes1 as the economic cycle evolves.