Triple-B rated corporate bonds have attracted much attention this year as they now represent more than half of the Investment Grade market. The growing number of BBBs is largely attributed to how Quantitative Easing and an unusually long period of low interest rates have made it easier and cheaper for companies to lever up and finance their businesses. Concerns about the amount of leverage this adds to the financial system have also put these credits into the limelight, particularly at a time when growth is slowing and recessionary threats loom.
We constantly look at how we can exploit market inefficiencies, but as the Brexit clock ticks, the need to protect against increased volatility and uncertain market risks becomes even more crucial. As such, because 3-month and 6-month Libor have been dropping towards overnight levels and therefore squeezing returns, there is no value going beyond six month maturities unless they are specific bonds we have selected because of conviction.
Fund management is ultimately about balancing risk and return within the relevant asset class to deliver value for your investors. As a result, it is optimal to be able to leverage different sources of return – and thus balance risk – within a portfolio. This ensures the fund manager is not overly reliant on one single factor. A prime example of this at Canada Life Investments lies within our LF Canlife Global Macro Bond Fund, which invests in high-quality, developed market, investment grade and sovereign bonds.
Although volatility has settled down from the violent end of 2018, global growth has moved into the slow lane and geopolitical uncertainties continue to drive the markets at higher-speeds. In the UK, assets remain unloved and, as the Brexit clock ticks, recent rallies in sterling suggest the market would welcome any sort of agreement that helps pave the way for leaving the European Union.
After some remarkable ups and downs in 2018, asset prices have come back to earth and global growth is now firmly in low gear. The US Federal Reserve’s quantitative easing (QE) withdrawal with four interest rate hikes last year made an impact across the board from widening corporate bonds to battered emerging market currencies and we expect this and the reaction to other central banks’ tightening to provide a headwind for the wider markets in Q1 of 2019.