Nick Maroutsos, Co-Head of Global Bonds at Janus Henderson, explains what he sees as the major factors influencing investors' decisions in 2019
There are three main factors we're looking at this year. The first being the Federal Reserve. By hiking interest rates over the last few years the Fed has dictated monetary policy globally. We expect numerous central banks to follow suit but due to the aggressive nature of the hikes in the US we think the other central banks will be more conservative in terms of how they go about any monetary tightening. The second factor is the level of rates. What we observed in 2018, particularly as it pertains to the US, were two occasions in Q1 and Q4 where interest rates shot up aggressively. The first one was as a result of misguided inflation fears. The second as a result of hawkish miscommunication from the Fed. So, the communication coming out of the central banks is critical because we believe they do not want to administer overly high rates that choke off the potential for economic growth.
Liquidity
The last major component that we think a lot of investors will be focussing on in 2019 is liquidity. It has garnered a lot of attention over the past few years. Global fixed income markets have changed their complexion because there's not as much issuance out there, banks are not holding as much debt on their balance sheet, and the bid/offer spreads are wider in terms of how these assets are traded. These factors mean liquidity will become a premium for much of this year.
Our absolute return income strategy was established to be nimble in the marketplace because we seek to opportunistically target unique returns throughout the fixed income markets. The US is no different. Historically we've been moderately long US duration
but we reduced that duration after Trump's election, specifically because the Fed was looking to normalise interest rates. We believe that the Fed is done with their hiking campaign and will move to a more balanced approach, which will encourage us to increase our level of duration in 2019.
Volatility
An important element in our approach is that we aim to keep volatility low through two major components. One is through the core assets that we manage but also through the structural alpha component which looks to mitigate interest rate and other risks. In relation to the core assets we're looking for unique names in the credit, mortgage and government space that look to provide returns to the end investor but which also do that in a low volatility manner.
This means focussing on names that are looking to de-lever in the marketplace and focussing on sectors in specific jurisdictions that have unique characteristics to that particular market - whether that be monopolistic characteristics, or state-owned enterprises in, for example, Asia ex Japan. Then within the alpha component we're looking to hedge out interest rate risk and hedge out credit risk in periods of time that we see stress. When it comes to certain central banks that may be hiking rates, we will look to hedge our interest rate risk. Whereas, where there are central banks that are on hold, we may increase the level of interest rate risk to capture exposure to attractive yields.
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