Muscat: Despite the expectation of a relatively near-term end of the economic cycle, investors are not foreseeing a significant correction in fixed income and rather expect the rare event of a soft landing with a continued flat yield curve.
This was revealed in Invesco's second annual Global Fixed Income Study, an in-depth report on the investment behaviour of fixed income investors.
In this, investors plan to maintain fixed income holdings in the search for yield, taking a more active approach to creating diversified scenarios of return through alternatives, emerging market allocations and investing in China.
The study, conducted face-to-face amongst 145 fixed income specialists and CIOs across Europe, the Middle East & Africa (EMEA), North America and Asia Pacific representing $14.1tn in assets under management (AUM), also found that investors are increasingly responding to the potential for geopolitical issues to disrupt markets.
Almost half (46 per cent) of investors have adjusted portfolio allocations in response to trade wars. Wholesale investors are particularly sensitive to such concerns and two thirds (65 per cent) have been influenced by Brexit to alter their European and UK allocations.
Only a third (34 per cent) of institutional investors noted that they are altering European and UK allocations as a result of Brexit. Further, investors’ outlook for the global economy has become more uncertain and divergent, with high global debt cited as the most likely trigger of the next downturn.
The end of the cycle
With the current economic expansion running for nearly ten years — one of the longest on record — some investors are nervous about its further longevity and are alert for triggers which could end it.
Globally, the most common view (49 per cent) amongst fixed income investors is that the end of the cycle is one to two years away i.e. late 2019 through late 2020. However more than a quarter (27 per cent) see an end sooner, within the next six months to one year. When comparing wholesale and institutional investors, wholesale respondents are relatively more pessimistic about the near-term outlook, with 65 per cent expecting the cycle to end within 2 years.
Regionally, the study also revealed significant differences in perspectives of fixed income investors across the globe. From an economic cycle perspective, APAC is the most convinced the expansion is on track for the next year or two, while EMEA is the most optimistic that it could well last beyond one to two years. North American fixed income investors, on the other hand, are less optimistic with over half (52 per cent) believing the expansion will end within a year.
Nick Tolchard, Head of EMEA for Invesco Fixed Income commented: “Politics in the US are likely to have contributed to North American fixed income investors’ pessimistic outlook. Elevated rhetoric from the Trump administration regarding trade with China, Europe, Canada, and Mexico, plus actual tariff impositions, have significantly impacted optimism."
"From a policy and markets perspective, perceptions that the Fed remained determined to remove policy support, and speculation of the potential for the yield curve to invert, would have added to concerns,” he added.