Flexibility with focus: how to position fixed income for volatility
After the inflation shock of 2021 – 2022 triggered a rapid rise in interest rates across most developed markets, cash and bond investors enjoyed a welcome boost in income thanks to the return of attractive yields.
Now, central banks have started to reduce rates. This should benefit bond investors by providing capital appreciation along with still high income. However, the path ahead may require skillful navigation, given stubborn inflation, growing differences in economic growth trajectories across countries and divergence in policymakers’ responses. Shifting geopolitics — especially the return of Donald Trump to the US presidency — present another factor of unpredictability. How should investors think about repositioning their portfolios for this prevailing uncertainty ?
Adapting to a structurally different macro background
Today’s uncertain outlook reflects a structural regime change that we believe investors need to be attuned to. The key features of this new economic era include:
- a less stable economic environment with more frequent shorter cycles;
- higher and more volatile inflation;
- increased geopolitical rivalry and divergence as globalisation slows and, in some areas, even reverses; and
- structurally higher government intervention and fiscal spending.
