Fixed income: adjusting to life after peak stimulus



Jim Cielinski, Global Head of Fixed Income and Head of Corporate Credit, sees 2019 as a year in which investors struggle to come to grips with the end of hyper-accommodative policies.

What key theme is likely to shape markets in 2019?

Key themes of 2018 included US economic divergence and a fixation on rising interest rates. Tighter monetary policy in the US was put on a collision course with easier fiscal policy. Both Treasury yields and the dollar moved higher, undermining previously lucrative carry trades and exposing the fragility within emerging markets. For 2019, the focus will shift to life after ‘peak stimulus’ as monetary policy becomes less accommodative and the impetus from fiscal stimulus fades. Higher volatility is likely to remain. The markets’ fixation will likely turn to whether an economic deceleration is too fast or too slow, and whether a slower pace is good for elongating the cycle. Politics will likely play a role of outsized importance.

Effects on real US GDP growth, 3-quarter centered moving average, %

Source: Goldman Sachs, as at October 2018. Assumes Goldman Sachs Financial Conditions Index remains constant at October 2018 level.

Where do you see the most important opportunities and risks within your asset class?

European risk assets are interesting: eliminate the Italian budget debacle and eurozone corporate credit is attractive. Deleveraging is underway and corporate cash flows remain resilient. European Central Bank policy should remain relatively accommodative, with interest rates unlikely to rise before late 2019.

Emerging market debt will likely be a case of 'the good, the bad and the ugly'. Dispersion has been pronounced, valuations have improved, and depressed local currencies should begin to soothe current account concerns. If global growth can hold up, we would expect recovery in some of the embattled markets.

Risks abound, as is often the case late in economic cycles. A policy mistake by the US Federal Reserve is a possibility. Fiscal stimulus makes it more challenging for policymakers to assess the lagged impact of the rate hikes, and inflation remains muted. Europe continues to be a source of political risk, notably around Italy and Brexit, where the classic ‘eurofudge’ may be harder to deliver when politics is so polarised.

How have your experiences in 2018 shifted your approach or outlook for 2019?

Markets in 2018 were obsessed with news events, headlines and tweets. I am reminded of just how critical it is for participants to decide if they are traders or investors. It is difficult to be both. Successful investors will be those who can filter the truly significant from the short-term noise and resist over-trading.

Expect the unexpected. The world is becoming more ‘bi-modal’: not all outcomes are symmetrical. Turkey, Italy, and a fully-fledged trade war are situations with outcomes that may be good or bad, but without much room in-between. Correlations, both within and across markets, may not respond as expected.

Globally, I think 2018 was the first year in what may be a longer period of less exciting asset returns. Investors will need to search harder for good risk-adjusted returns and products that are tailored to their needs.

Which themes have the potential to redirect markets in 2019? Download our Infographic to find out

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

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