Looking for opportunities amid volatility

18 August 2016
| By partnerarticle |
image
image
expand image

By Arif Husain 
Head of International Fixed Income
Portfolio Manager for the Dynamic Global Bond Fund

Fixed income investors endured a rough ride in the first half of 2016. Safe haven sovereign yields fell and risk premiums initially spiked amid concerns over the speed of China’s economic deceleration, collapsing oil prices and the timing of the Federal Reserve’s next rate hike. However, risk appetite returned in mid-February as China shifted its focus from restructuring the economy to supporting growth, commodity prices rebounded, and major central banks assumed a more dovish stance.

Britain’s vote to leave the EU in late June halted this momentum. News of the ‘leave’ vote caused higher quality bond market yields to fall to new lows and, initially at least, demand for riskier assets to decline. Over the next few months, uncertainty surrounding the implications of Britain’s decision to leave the EU including the direct impact on growth rates there and elsewhere, will leave markets susceptible to bouts of risk aversion and subsequent relief rallies.

There remains a strong structural argument for yields remaining low for the long term. However, recent economic data has been surprisingly positive – apart from the UK, there has been little evidence of a post-Brexit move towards global recession. Higher yields in the short term particularly in the U.S., are a possibility. In this environment, a smart investment strategy may be to identify countries where yields are relatively high and may have potential to decline due to disinflation and subdued growth. Australia’s Reserve Bank, for example, reduced rates in May and again early this month, and could do so again before year-end. Although further cuts have been largely been priced in, intermediate-term Australian bonds should remain resilient if U.S. yields rise. 

As we head into the second half of the year, investors find themselves facing multiple risks. Markets are bracing for complex, drawn out, and disruptive post-Brexit negotiations. The Chinese government is walking a fine line between supporting growth and discouraging the accumulation of even more debt.  Meanwhile, the Fed faces a difficult situation, wanting to raise rates to gain policy flexibility and keep credit growth from overheating, but also wary of these global headwinds de-railing the moderately paced US growth cycle.  Investors are keenly looking for signs of growth in Europe and Japan amid concerns that central bank policy tools have lost their potency; they are also watching to see if the current floor under oil prices is really sustainable given oversupply.

With overall valuations again at less attractive levels, risks appear to be asymmetric – offering more downside than upside. In this environment, we believe investors will benefit from a long-term focus and an unconstrained, flexible, risk-aware approach. Our Dynamic Global Bond Strategy is designed to use this approach to deliver positive returns from global fixed income markets, with particular focus on downside risk management and providing diversification away from equities. One of the advantages of an unconstrained approach is that it gives us the freedom to move quickly in and out of major short- and long-duration positions as the markets change. This enables us to take – or hedge – risk where it appears most advantageous, while maintaining sufficient liquidity in portfolios to be able to ride out turbulent markets and exploit ensuing opportunities. 

 

Click here ;dc_lat=;dc_rdid=;tag_for_child_directed_treatment=?" BORDER="0" HEIGHT="1" WIDTH="1" ALT="Advertisement"> to learn more about our unconstrained approach to fixed income.

        

Important Information: This information is not intended to be a recommendation to take any particular investment action and is subject to change. No assumptions should be made that the securities identified and discussed above were or will be profitable. This material, including any statements, information, data and content contained within it and any materials, information, images, links, graphics or recording provided in conjunction with this material are being furnished by T. Rowe Price for general informational purposes only. The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price. The material does not constitute a distribution, an offer, an invitation, recommendation or solicitation to sell or buy any securities in any jurisdiction. The material has not been reviewed by any regulatory authority in any jurisdiction. The material does not constitute advice of any nature and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

Australia—Issued in Australia by T. Rowe Price International Ltd. (ABN 84 104 852 191), Level 50, Governor Phillip Tower, 1 Farrer Place, Suite 50B, Sydney, NSW 2000, Australia. T. Rowe Price International Ltd. is exempt from the requirement to hold an Australian financial services licence in respect of the financial services it provides in Australia. T. Rowe Price International Ltd. is authorised and regulated by the UK Financial Conduct Authority under UK laws, which differ from Australian laws. For Wholesale Clients only.

T. ROWE PRICE, INVEST WITH CONFIDENCE and the Bighorn Sheep design are, collectively and/or apart, trademarks or registered trademarks of
T. Rowe Price Group, Inc. in the United States, European Union, and other countries. This material is intended for use only in select countries
2016-GL-4562

AUTHOR

Recommended for you

sub-bgsidebar subscription

Never miss the latest news and developments in wealth management industry

MARKET INSIGHTS

This verdict highlights something deeply wrong and rotten at the heart of the FSCP. We are witnessing a heavy-handed, op...

1 day 5 hours ago

Interesting. Would be good to know the details of the StrategyOne deal....

5 days 11 hours ago

It’s astonishing to see the FAAA now pushing for more advisers by courting "career changers" and international recruits,...

3 weeks 3 days ago

Insignia Financial has made four appointments, including three who have joined from TAL, to lead strategy and innovation in its retirement solutions for the MLC brand....

2 weeks 5 days ago

A former Brisbane financial adviser has been charged with 26 counts of dishonest conduct regarding a failure to disclose he would receive substantial commission payments ...

4 days 9 hours ago

Pinnacle Investment Management has announced it will acquire strategic interests in two international fund managers for $142 million....

3 days 12 hours ago