2021: The fixed income specialist view

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December 15, 2020
 

In November 2020 we sampled the views of 106 analysts and managers from five investment firms within BNY Mellon Investment Management about the year ahead. Here, we drill down to the fixed income outlook for 2021.

Bullish on high yield bonds, bearish on sovereign debt. That was the broad view of the bond experts that responded to BNY Mellon Investment Management’s sentiment survey about the year ahead. The survey was a sampling of views from 106 investment professionals at Newton, Mellon, Insight, Walter Scott and Alcentra.

Where the majority of the equity and multi-asset managers and analysts who took part in the survey were generally bullish, respondents from the world of fixed income were more nuanced.

More than half said they were either selectively bearish or bearish on sovereign debt, with only 6% describing themselves as bullish on the asset class. Spending commitments to revive economies post- Covid as well as the possible threat of inflation dampened views on government debt.

When asked about corporate debt, however, the picture shifted completely: 65% described their outlook as selectively bullish or bullish. Their favored asset class within fixed income? High yield (38%), private debt (30%) and fallen angels (22%). Investment grade had a less than sanguine outlook with just 8% of the bond experts in the survey saying they expected it to outperform in 2021. Despite the potential threat of inflation, c5% selected inflation-linked bonds as a sub-class likely to perform best in the coming year.

In their own words…

As part of the survey we asked respondents to provide their own views about the factors that could affect sovereign bond market returns in 2021. Here are some of those responses:

  • “The risk of inflation as a result of borrowing could lead to higher rates”
  • “Strong economic growth is likely to stoke mid-term inflation fears”
  • “After a large number of sovereign credit downgrades in 2020, I foresee a more stable environment in 2021, but not particularly attractive.”

Here are their views when we asked the same question on corporate debt:

  • “Support from governments and central banks will continue. Issues should benefit from demand in the search for yield.”
  • “I believe credit should outperform but longer duration corporates will likely face headwinds from rising rates.”
  • “Levered companies will likely pay-off their debt, thereby improving credit spreads.”
  • “Many sectors are already trading close to or at pre-Covid spread levels - there are only a few pockets of value left.”
  • “Rates have fallen tremendously and the net real return is not great overall. Pockets of value do exist though.”

2021: The macro view

Asia looks to be the land of investor opportunity this year while the UK may be best avoided. Our equity, fixed income and multi-asset specialists gave their macro outlook for the year ahead.

Our first set of questions were about the wider economy and the possible pace of recovery. Do our managers and analysts expect to see a strong rebound – and, if so, which parts of the world do they think will perform better than others? What are the main risks on the horizon?

On the whole, our respondents were optimistic, seeing good scope for a solid economic rebound, albeit with significant potential headwinds to watch out for.

Over 70% of respondents said they expect global GDP to grow strongly or sharply in 2021, with a further 27% saying they believe GDP will grow marginally. Only 3% of respondents said they believed the economy would contract. Given this response, it’s perhaps no surprise that nearly half of the analysts and managers who responded said they would be more aggressively positioned this year than last, with only 11% saying they would adopt a more defensive stance in their investment approach.

A spotlight on Asia

A clear trend also emerged when we asked which geography would offer the best investment returns. Here, Asia was the clear winner: Nearly half of respondents identified the region as offering opportunity, while the US came second with close to 30%. (This presents an abrupt shift from our 2019 survey when the same question elicited an almost mirror-image response: 43% chose the US and 30% chose Asia.)

If you add in responses from this year’s survey citing Latin America (12% of respondents) and the Middle East (2%) it seems at least some of our investment teams will be looking to emerging rather than developed markets for the best investment opportunities in the year ahead.

In contrast, with Brexit biting, only 3% of those taking the survey expect the UK to fare best this year. Almost 12% chose Europe as their top pick for opportunities.

Risks on the horizon but no real consensus

A more diverse mix of opinions were on show when we asked what the biggest risks were likely to be in the coming year. Rising debt (23%), central bank policy (17%), political risk (15%) and inflation (14%) all had a showing, but unemployment – flagged by 32% of respondents – came out ahead as the key concern. Again, a contrast with last year’s survey is telling: in Q4 2019, the majority of our specialists flagged political risk as their main worry.

Risks:

All investments involve some level of risk, including loss of principal. Certain investments have specific or unique risks. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

Recent market risks include pandemic risks related to COVID-19. The effects of COVID-19 have contributed to increased volatility in global markets and will likely affect certain countries, companies, industries and market sectors more dramatically than others.

Views expressed are those of the author stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change. This information contains projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or expectations will be achieved, and actual results may be significantly different from that shown here. The information is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.

Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Please consult a legal, tax or financial professional in order to determine whether an investment product or service is appropriate for a particular situation.

Newton and/or the Newton Investment Management brand refers to Newton Investment Management Limited. Newton is incorporated in the United Kingdom (Registered in England no. 1371973) and is authorized and regulated by the Financial Conduct Authority in the conduct of investment business. Newton is a subsidiary of The Bank of New York Mellon Corporation. Newton is registered with the SEC in the United States of America as an investment adviser under the Investment Advisers Act of 1940. Newton’s investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request.

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