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 face a conundrum adjusting their fixed income allocation moving into 2019 as market volatility persists with US-China trade tensions and Brexit. Nonetheless, China is switching to an easing bias to support growth. And the US Federal Reserve’s rhetoric has shifted to a more dovish tone, emphasising that it can afford to be patient and hold back on raising interest rates.
With evolving market conditions, where are the sweet spots in fixed income?
Let’s consider the current macroeconomic backdrop. The global economy is expected to post positive growth this year though the momentum may slow. The US economy, which is instrumental to global growth, continues to grow on the back of robust household income, solid business activities and corporate profit margins. With a still-expanding global economy, market volatility has actually opened up opportunities in fixed income.
Fixed income investors may want to create a diversified portfolio that can tap relative values and produce possible long-term returns. For example, the sell-off in high-yield (HY) credit1 last year generated attractive spreads relative to expected defaults, in a reasonably strong US economy.
|as of 31/12/2018||as of 31/12/2017|
|US high yield
|Euro high yield||575||346|
With persisting volatility, investors will need to stay agile as they strive to build a more resilient portfolio. Rather than merely raising the fixed income component within their portfolios or focus on one single sector, it is crucial for investors to diversify across different fixed income asset classes as the economic cycle evolves.