New benchmarks for a new era of investing | fixed income, bonds

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Persistent inflation continues to challenge investors and portfolio planning. For fixed income instruments, in particular, the rapidly changing economic environment means investors need to focus on how to strike the delicate balance between protection and performance.

In the broader government bond markets, investors may suddenly find yield; the volume of negative yielding government bonds suddenly disappeared, at least compared to two years ago.

The new investment climate favors shorter duration government bonds. Combined with inflation, short-term Treasury Inflation-Protected Bills (TIPS) have the potential to perform well as investors limit their exposure to US interest rates.

Specifically in Asia, Chinese government bonds look attractive for the coming months. Given some correction in RMB appreciation, the outlook looks fairly stable and bright over the medium term.

Yet market dynamics bring with them more sophisticated – and complex – requirements. Whether it’s the danger of central banks overdoing their bid to control inflation or how they’re handling quantitative tightening, there doesn’t seem to be a clear path for adapting portfolios to the regime. current investment.

With this in mind, to help shed light on the macroeconomic outlook and its implications for investment decisions, FinanceAsia and LSEG brought together market specialists in a recent webinar:

  • Stefanus Ade Hadiwidjaja, Investment Director, Indonesia Investment Authority
  • Hui Sien Koay, Senior Index Fixed Income Strategist, Asia ex Japan, black rock
  • Michael Hampden Turner, Director, Management and Research of FIMA Index Products, LSEG

Read some of the takeaways below and watch the on-demand version here


KEY IDEAS

A new era of inflation and rates

Hui Sien Koay
“In an environment of higher volatility and inflation in the markets, the consensus among investors is the need for more dynamic adjustments to allocations and portfolios. The trade-off between growth and inflation is now much more difficult to manage; buying the dip or betting on the mean reversion does not apply.Investors should also prioritize liquidity.


Michael Hampden Turner
“I think it’s almost certain that central banks are going to overshoot. They’re trying to fight inflation by restricting demand, while the challenges are mostly related to supply chain disruption, especially from suppliers. For example, there have been significant increases in major agricultural commodities due to the war in Ukraine, as well as the ripple effects, leading to higher food prices around the world. energy almost doubled year on year.

Stefanus Ade Hadiwidjaja
“As an example of a large emerging market in Asia and the world, Indonesia has so far this year enjoyed a stable economy. Inflation is around 3.5% and the central bank recently announced that it would keep the benchmark rate at 3.5%. We are getting back to normal fairly quickly following the pandemic. While Indonesia has been affected to some extent by the rising cost of some commodities, such as oil and wheat, the national economy has held up well. We are convinced that we will not see a recession in the country. »


Find the right portfolio balance

Hui Sien Koay
“The traditional 60/40 portfolio mix of stocks (60%) and bonds (40%) doesn’t seem to be working in the current environment. This means investors need to do more work and risk models need to be recalibrated. A more appropriate portfolio mix might be 40/30/30 – comprising traditional fixed income securities (40%), public stocks (30%) and private assets (30%).

Michael Hampden Turner
“In terms of the impact of this environment, within the fixed income universe, long-term rates products suffered some of the largest losses. At the same time, inflation-linked products also performed poorly. “Safer” bets to preserve capital include shorter-maturity floating-rate notes as well as Chinese sovereign bonds. »

Hui Sien Koay
“Against this backdrop, investors should bear in mind that government bonds in Asia still play a very important role, with the liquidity of government assets remaining of paramount importance.”


Allocation and performance of asset classes

Hui Sien Koay
“Key vanilla sectors in public markets play an important role in this economic climate, but conversations are dominated by defensive exposures to equities and fixed income, to protect portfolios as investors struggle. adapt to the new playbook.”

Stefanus Ade Hadiwidjaja
“Our portfolio invests primarily in more stable sectors, which we view as including transportation infrastructure, digital infrastructure and healthcare. We also find that companies are focusing heavily on profitability, to weather the impact of inflation. To support this, there is growth in the Indonesian market and the sentiment is generally positive.


Michael Hampden Turner
“Investors should also consider the impact of quantitative tightening, for which there is little experience. This process typically involves four steps, which central banks consider a monetary policy tool as much as key rates to cool the economy and fight inflation. From a market perspective, the shift ranges from quantitative easing, where central banks buy bonds and positively influence the market, to the final sale of the portfolio in regular amounts each month. This can have negative implications for the market as investor demand becomes saturated and prices must fall to stimulate demand.

Hui Sien Koay
“Based on global fund flows, bonds are slightly at a disadvantage judging by outflows this year, compared to inflows in 2021. However, index activity is showing positive flows to ETFs, dominated by Treasuries and higher quality, shorter duration exposure Inflation-linked bonds attracted periodic interest.

Michael Hampden Turner
“In terms of index performance, investors tend to view inflation-linked indices as counter-cyclical. However, these products have a strong rate component, so whenever there is a large movement in rates, inflation-linked indices tend to lose money, even if rates rise. Today, inflation-indexed indices are pricing in high inflation rates for the next five years, so it may be too early to buy into them.

¬ Haymarket Media Limited. All rights reserved.

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