Jack Willis and Connor Godsell discuss the outlook for fixed income markets, where are the opportunities and challenges, and why investors are likely to be rewarded for good credit selection decisions.
Jack [00:00:11] Geopolitics shows no sign of taking a back seat, and while markets have largely brushed off recent events in South America, there are a number of both existing and potential flashpoints to monitor. Fiscal policy and political instability will also remain in focus across developed markets. With US and German growth set to be potentially benefit from fiscal policy, whilst in France attention will likely remain on the ability of the current government to hold itself together amidst a weaker fiscal backdrop.
Connor [00:00:39] We remain constructive on investment grade corporate bonds and fixed income in general. With spreads where they are, we expect returns to be driven mainly by carry rather than through further meaningful spread compression. We also want to keep flexibility within the Funds to add risk if volatility creates better entry points. Fundamentals have softened somewhat in parts of the market, but margins remain robust and many defensive sectors are holding up well. Refinancing at higher rates will keep pressure on interest coverage and selection will matter more. That plays to our strengths. We also see potential for capital gains if government bond yields fall and we continue to maintain a long duration stance. With all-in yields still above 5%, we believe the starting point for returns remains compelling.
Jack [00:01:25] So with credit spreads remaining fairly well contained close to historic lows, we think this year will be one in which investors will be rewarded for good credit selection decisions, and our team has a very strong track record when it comes to Alpha generation from credit selection. We will continue to focus on selecting what we believe to be the best bonds on offer within our favoured companies. If 2025 is anything to go by, one thing we can say for sure is that it should be another exciting year ahead.
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Past performance does not predict future returns. You may get back less than you originally invested.
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