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Turbulence, disruption and uncertainty have always provided instances of opportunity for the savvy fixed income investor. While superficially much had changed in the last three months of 2018, at the fundamental level, things did not. So says Andrew Jackson, Head of Fixed Income at Hermes Investment Management, in his quarterly market update.
Some of the more effusive commentators variously described the final quarter of 2018 as a catastrophe and a blood bath – their responses to January’s bounceback have been equally hyperbolic. This has left many investors scratching their heads as to what exactly has changed. My short answer is that nothing actually changed: we just noticed that the emperor was somewhat under-dressed.
We do not see a huge reduction in tail risk despite the easing in some of the rather over-stretched technical indicators. The long-term fundamental issues in the world remain unchanged; we still don’t know what form Brexit will take; the European political backdrop is still far from clear; and the rise of protectionism still hangs like a dead weight around the neck of global GDP growth. We also think it is vital to caution that this sell-off was not the big one; at no time during the sell-off did I feel that it represented anything more significant than a slight correction in the huge bull run that has endured far too long.
While uncertainty does remain, we tread cautiously and looking across our fixed income platform, we have identified a number of opportunities across global markets:
Public credit
Leveraged loans
Structured securities
Private lending
Asset-based lending
Whilst rumours of the death of the bull market continue, we believe that markets are more balanced as a result of Q4’s slight correction. That does not mean investors should be complacent, the repricing of equity markets is positive for forward-looking sentiment but the speed of the retracement in January is slightly less healthy. Having been battered once in Q4 2018, market participants in less-liquid areas may be less willing to sit on their hands if we see another major test of resolve in the near-term.
Click to read the Hermes Fixed Income Quarterly Report in full.
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