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With recovery comes opportunity

With recovery comes opportunity
Yannik Zufferey, PhD - Chief Investment Officer, Core Business

Yannik Zufferey, PhD

Chief Investment Officer, Core Business
Philipp Burckhardt, CFA - Fixed Income Strategist and Senior Portfolio Manager

Philipp Burckhardt, CFA

Fixed Income Strategist and Senior Portfolio Manager
Jamie Salt, CFA - Systematic Fixed Income Analyst and Portfolio Manager

Jamie Salt, CFA

Systematic Fixed Income Analyst and Portfolio Manager

With the remarkable year of 2020 in the history books, we look ahead to a year of new challenges and opportunities to navigate within Fixed Income.

Our base scenario sees a successful vaccine rollout and a return towards economic normality in 2021, backed by exceptionally easy monetary and fiscal policy. This should provide a supportive backdrop for risk assets to continue the H2 2020 rally into 2021.

The ongoing collaboration of monetary and fiscal policy is a vital component in supporting a regime of structurally higher debt levels. Whilst beneficial to financial markets, this will see rates along the curve remain lower for the coming year, and beyond. However, if maintenance of low rates is imperative, then any exogenous factor that threatens the plausibility of the policy mix is a key risk factor. We see a potential resurgence of inflation as the most obvious threat here, and fixed income allocations should reflect as such.

Active management backed by rigorous credit, sustainability and macroeconomic analysis will be imperative to unlock Fixed Income’s strong performance potential in 2021

We continue to champion sustainability as a focal point in asset selection across fixed income segments. We see ongoing potential for idiosyncratic risk mitigation via more innovative sustainability analysis, as well as alpha opportunities in the transition of corporates and sovereigns towards the Circular, Lean, Inclusive and Clean (CLIC™) economic model.

Government bonds remain a key component in fixed income asset allocation frameworks for the coming year. We consider any substantial drawdown concerns to be capped by central bank intervention, whilst their capacity for downside protection remain relevant and appealing. We also like the prospect of active opportunities within newer, growing, higher carry markets, such as China.

We are optimistic for corporate credit’s medium-term outlook and we like the carry aspect it provides. High yield, particularly BBs, and subordinated debt offer compelling relative value opportunities as well  further room for spreads to tighten to pre pandemic levels in particular names and sectors.

Similarly, EM fixed income is a beneficiary in the hunt for yield and, consequently, the strong positive sentiment seen in the final months of the year are likely to carry on into 2021 for both corporates and sovereigns. However, we do highlight the likelihood of wide variations in EM economic recovery speeds, as COVID vaccine rollouts will vary greatly across regions. Furthermore, bloated fiscal balance sheets could pose a further problem, leaving the FX channel as a possible point of concern for vulnerable EMs.

The stage is set for 2021 to be a positive year for risk assets, but at current valuations, innovative and nimble asset allocation and security selection will be key to generate alpha and compensate for lower beta carry. Hence, active management backed by rigorous credit, sustainability and macroeconomic analysis will be imperative to unlock Fixed Income’s strong performance potential in 2021.


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