Fixed Income

Global growth is expected to grind lower in 2019, with continued monetary policy normalization in developed markets being the key headwind for the world economy. Financial conditions will tighten further as the Fed continues its gradual increase in interest rates.

In December, US Treasury (UST) yields fell as risk assets came under pressure from various factors, triggering ‘safe-haven’ buying.

The Australian bond market (as measured by the Bloomberg AusBond Composite 0+ Yr Index) was up 1.50% over the month, outperforming Australian equities which fell 0.12%.

US Treasuries (USTs) registered gains in November, while yields fell along with faltering US equities.

The macroeconomic backdrop for Asian countries should remain broadly neutral for credit performance in 2019. GDP growth is expected to moderate across the key economies, although we don’t expect any hard landing scenarios to materialize.

Shakespeare once said, “present fears are less than horrible imaginings.” As we come to the close of 2018, we have observed equity markets turn double-digit returns to losses, an aggressive rise in interest rates and a modest increase on the perception of escalating tensions surrounding the world’s two largest economies.

In addition, we have to consider the eventuality of a prolonged trade war. But China would be able to mitigate its impact initially via a combination of monetary and fiscal stimulus, helping offset the impact of tariffs to a certain extent.

Credit markets didn’t perform in line with the expectations we set at the beginning of the year and disappointed most investors.

So many developments have occurred since we last met in September, but the major ones were the surprising collapse in oil prices mostly due to geopolitical factors, the U.S.-China trade and BREXIT conflicts becoming increasingly intractable, and that aspects of the global economy showed occasional signs of moderation.

Global growth remains desynchronized, with China, the Eurozone and Japan continuing to show further signs of moderation, while the US remains relatively robust.

The Australian bond market (as measured by the Bloomberg AusBond Composite 0+ Yr Index) was up 0.24% over the month, outperforming Australian equities which fell over 2%.

Global growth remains desynchronized, with China, the Eurozone and Japan showing a further moderation in growth, while the US remains robust.

The US economy is enjoying its second-longest growth cycle in history and is on the way to becoming the longest on record.

US Treasury (UST) yields spiked at the start of October as the market responded to stronger US data and Federal Reserve (Fed) Chairman Jerome Powell's hawkish comments.

On the back of unrelenting USD strength, 2018 has been a tumultuous period for Asian currencies. Countries in the region with current account deficits have been facing more currency pressure, prompting their central banks to engage in series of rate hikes to defend their currencies.

The Australian bond market (as measured by the Bloomberg AusBond Composite 0+ Yr Index) was up 0.48% over the month, outperforming Australian equities which tumbled over 6%.

In September, the US Federal Reserve (Fed) raised interest rates by 25 basis points (bps). The monetary authority removed the clause that policy rates are "accommodative", and modestly raised its growth forecasts for this year and next.

The Australian bond market (as measured by the Bloomberg AusBond Composite 0+ Yr Index) was down 0.42% over the month.

In August, the US Treasury (UST) curve flattened. Near-term yields rose due to expectations of a September Federal Reserve (Fed) rate hike, while mid to long-dated yields fell. Escalating US-China trade tensions and the weaker-than-expected July US jobs report pushed UST yields lower at the start of the month.

The Australian bond market (as measured by the Bloomberg AusBond Composite 0+ Yr Index) was up 0.81% over the month. The yield curve flattened as the spread between long-term and short-term bond yields narrowed.

We entered the year optimistic, and with the knowledge of the last six months, we are pleased that most of our expectations worked out.

Global growth remains desynchronized, with the Eurozone, Japan and the UK showing an ongoing moderation in growth, whilst the US remains robust.

In July, US Treasury (UST) yields rose. US-China trade tensions continued to persist. The risk of a trade war between the US and Europe tempered after the two countries announced they will cut trade barriers.

In March 2018, Bloomberg announced a conditional decision to include Chinese bonds in its flagship bond index: Bloomberg Barclays Global Aggregate, starting from April 2019.

In June, the US Treasury (UST) curve flattened. The US Federal Reserve (Fed)'s 25 basis points (bps) rate hike was accompanied by a more hawkish tone, supporting higher short-term rates.

Global growth is becoming increasingly less synchronized, with the Eurozone, Japan and UK showing an ongoing moderation in growth, whilst the US remains robust.

Our London-based Emerging Market fixed income portfolio manager provides an update for Latin American markets in the midst of a hectic election schedule. Despite the risks, pro-market reforms should still progress to varying degrees across the region.

In May, US Treasury (UST) yields ended lower. A solid US jobs report supported the bearish bias in UST yields that prevailed.

The ECB recently celebrated its 20-year anniversary and instead of a birthday cake, DB research released a compelling chart about how different asset classes have performed over this time period.

Despite uninspiring global equity performance in the last three months, at least for USD-based investors, Nikko AM’s Global Investment Committee continues to be positive on global equities on a one-year view, particularly those in Japan, Europe and the Asia Pacific, but remain unenthusiastic on global bonds.

Global growth is becoming increasingly less synchronized, with the Eurozone, Japan and UK showing some moderation in growth, whilst the US remains relatively robust.

US Treasuries (USTs) experienced a sharp sell-off in April as yields rose about 10 to 24 basis points (bps) across the curve. Trade war fears between US and China receded, with Chinese President Xi Jinping's commitment to further open up the economy to foreign businesses.

The broad-based synchronized growth story continued to soften through March, as consumers pared back purchases in the face of rising prices.

US Treasuries (USTs) traded in relatively tight range in March, with the yield curve bull flattening. The US Federal Reserve (Fed) raised interate rates by 25 basis points (bps), and signalled it could lift rates at a marginally more aggressive pace in coming years.

Many economists and currency analysts, after years of ignoring such “old fashioned” indicators, are now talking about the massive trade surplus that the Eurozone enjoys with the world, but in particular with the US.

Our London-based Emerging Market fixed income analyst predicts increased volatility ahead for Latin American markets due to the threat of Leftist election victories this year, but that pro-market reforms will still progress.

Our updated view remains positive on the global economy and equity markets even as global bond yields rise a bit further. Our SPX target remains near 3000 by year end, with impressive gains elsewhere too.

A broad-based synchronized recovery continues to gain traction. Following the strongest year of global growth since 2010 (estimated at 3%) the consensus forecast for the current year looks to be even rosier.

In February, US Treasuries (USTs) succumbed to a further sell-off, with yields rising across the curve prompted by better US economic data.

Poor economic and fiscal policies are, and will likely be, a recurring theme in Italian politics. However, from a trade perspective, we see Italy to remain a good carry/spread trade for at least the next twelve months against a backdrop of improving GDP growth in 2018 and 2019.

A broad-based synchronized recovery continues to gain traction. Following the strongest year of global growth since 2010 (estimated at 3%) the consensus forecast for the current year looks to be even rosier.

There was a sharp rise in US Treasury (UST) yields in January on the back of positive macro news, steady rise in oil prices and speculation that central banks in developed markets will start winding back on stimulus measures.

Our Senior Portfolio Manager for Emerging Markets in London forecasts that in 2018, this asset class could well match 2017’s achievement.

A broad-based synchronised recovery continues to gain traction. Following the strongest year of global growth since 2010 (estimated at 3%) the consensus forecast for the current year looks to be even rosier.

As widely expected, the US Federal Reserve (Fed) raised interest rates by 25bps in December, its third rate hike this year. It also raised its GDP forecast for 2018.

For 2018 and beyond, we see a story of central bank policy normalization and foresee the global economy growing in a similar fashion to how it did in 2017: low growth coupled with comparatively low inflation data.

We see the key investment themes to drive performance in Global Credit in 2018 to be similar to last year. We have developed our investment themes: Long US High Yield, Long Chinese Tier1 SOEs, Long European Hybrids, Long European Financials, Long Rising Stars.

We expect the economic backdrop for Asian credits to remain constructive in 2018, but remain cognizant of several risks including rising interest rates, robust supply, unexpected weakness in China, geopolitical developments and cross-asset volatility.

The global recovery is expected to continue, albeit at a more moderate pace. Meanwhile, we foresee policy normalisation and an acceleration of inflation in Asia.

Low global inflation and, until recently, a strong Kiwi dollar have kept New Zealand’s inflation rate low over many years, however things may be about to change.