Kames’ CIO: Fixed income’s demise has been greatly exaggerated
Bond markets face a much tougher environment as rates start to normalise, but investors need not fear an Armageddon-style scenario for fixed income, Kames Capital’s Chief Investment Officer Stephen Jones has said.
While investors have started to move away from the asset class after a multi-year bull run of falling yields and rising prices, Jones said investors should not unwittingly write-off the asset class.
“Fixed income has had a much tougher year so far in 2015, with the worst quarter ever for European government bonds, and overall for the year you could see core government bonds globally fall by around 3.5%,” he said.
“However, this is not an Armageddon scenario. There is still value in sectors such as investment grade and high yield, and indeed the average fund in both the Strategic Bond and High Yield sectors remain in positive territory year-to-date.
Jones acknowledged that many bond markets have seen losses year-to-date, but said there are still opportunities to make positive returns.
In particular, he is not predicting a sharp spike in defaults in the high yield space, despite the increasing likelihood that rates may rise at the end of the year.
“We are not expecting a big surge in defaults for high yield, and they will not be anywhere near as high as investors fear in areas like energy,” he said.
“With global GDP growth likely to come in around 4% this year, the backdrop for companies remains supportive, and so there is every chance of making a positive return from sectors like high yield and investment grade bonds.”
Among the worst performers so far this year are global and emerging market bond funds, as well as UK gilt funds, following sharp moves out in yields**.
However, Jones said this downturn in performance comes after a 12-month spell which saw the average fund in every fixed income sector make positive returns. Among the stand-out winners last year were UK Gilt and UK Index Linked Gilt funds, where the average fund returned 14.5% and 18.7% respectively.