How Today's Economic Conditions Affect Global Multi-Asset and Fixed Income Investing

In this, the first of four discussions with senior strategists from Standard Life Investments that will be presented over the next few months, we focus on Standard Life Investments’ assessment of the global economy and how today’s conditions are affecting fixed income and multi-asset investing.


From left: Alexander Wolf, Mark Foster, Richard House

What are the most important factors affecting global bond markets today?

Alexander Wolf: They would be the Federal Reserve’s impending rate hike, the quantitative easing (QE) policies in Europe and Japan, and how those trends will impact dollar liquidity conditions and the strength of the dollar. Also the European Central Bank’s QE program is definitely supportive of European bonds, and could result in a resurgence in European growth. It’s a complex global situation where investors will find it challenging to identify specific winners and losers.

Richard House: How the Greek situation is resolved will affect the whole European bond market. Investors need to pay close attention to Greece, as that should temper the bullish European bond market story.

Mark Foster: Since the U.S. and Europe are at different ends of the policy spectrum, I would expect to see multi-speed global growth. When currencies, valuations and policies are changing, a relative value strategy comparing different countries to each other may be quite useful.

Where do you see the best growth prospects this year among the large global economies?

Wolf: The best prospects in the developed markets would be the US and UK, where signs of improving labor market strength indicate the recovery has a solid footing.

House: In the emerging markets, Brazil is having problems at the moment. We are very optimistic about India, given the reform effort there. It’s a similar story in Indonesia, Poland and Hungary. Obviously, Russia also has its issues, and we’re avoiding it because we’re very uncertain about its outlook. So it is a very mixed picture and impossible to generalize.

What about the upticks in inflation?

Wolf: Wage growth in the US and UK and stabilization of fuel prices indicate that we will start to see some increase in inflation in the second half of the year. In emerging markets, there was an uptick in India due to higher food prices. However, excess capacity and fairly weak demand are keeping inflation fairly low in other developed and emerging markets, especially China.

What is your outlook on interest rates, and what strategies have worked and not worked for multi-asset portfolios?

Wolf: Our view is that the Fed will hike rates later this year and the UK will follow afterwards. Some emerging markets, in turn, also may raise their rates.

House: Many of the bond markets are already starting to price in rate hikes, particularly in Brazil, Mexico, South Africa and most of Eastern Europe, while Asia is a mixed bag. But in Brazil, we think the market is overly pessimistic. Given the state of the nation’s economy, we don’t think Brazil’s central bank will raise rates to match the pricing now reflected in the futures market.

Foster: In 2014, two strategies that did particularly well in our multi-asset portfolios were Mexican government bonds and Australian short-term interest rates. In the US and UK, like a lot of other investors, we took short-duration positions because we felt that long term interest rates were likely to increase ahead of expectations over a three-year time horizon. That hurt our absolute return portfolios during 2014, but within a balanced mandate, those were just two of about 30 strategies.

Wolf: There are reasons to be both positive and negative on Mexico; their energy reform plan is being affected by low oil prices, but Mexico is also a clear-cut beneficiary of lower US WTI oil prices and strong US growth. On the back of increased US demand and rising wages in China, Mexican manufacturing has emerged as a key engine of growth.

Where does fixed income investing fit into your core multi-asset strategies?

Foster: Fixed income should be one of the building blocks, but it shouldn’t dominate your portfolio. We believe in a broad opportunity set to create a well-balanced portfolio.

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