74% of UK asset owners bullish on fixed income opportunities in year ahead

by | May 15, 2024

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Driven by a favourable fixed income outlook, 74% of UK asset owners say the next 12 months is a crucial window for locking in long-term income in high quality bonds, according to a new study by Capital Group, one of the world’s largest active fund managers, with assets under management of more than US$2.6 trillion. 

Anticipating interest rate cuts before the year end, 51% of UK asset owners are extending the duration of their bond portfolios. Meanwhile, nearly twice as many investors (28%) express confidence in increasing credit risk exposure compared to those (15%) who are decreasing it, albeit with a discerning and cautious approach. This risk-aware stance has prompted UK investors to believe that active strategies will outperform passive ones across all fixed income sectors in the coming 12 months. Notably, this conviction is strongest for high yield (HY) credit, where 83% believe active management will enhance value, and in emerging market debt (EMD), where 81% share the same sentiment.

Furthermore, asset owners are actively seeking compelling income opportunities on an international scale. Key asset allocation trends from the findings are:

 
 
  • Preference for US and Europe: UK investors are favouring the US and Europe over domestic bonds as they rebalance their investment grade (IG) credit portfolios. A significant 75% plan to either increase or rebalance their allocations to IG corporate credit in the coming year. US IG corporate credit (37%) and the eurozone (34%) are preferred over the UK (23%).
  • US and global investment grade credit: Investors view US and global IG credit as the most attractive opportunities in credit markets. Notably, US IG credit (28%) is perceived to offer more favourable prospects than European IG credit over the next 12 months, amidst a more robust economic outlook in the US.
  • Strategic role of high yield and emerging market debt: Traditionally considered “niche” fixed income sectors, the growth in HY and EMD markets has elevated their strategic importance. Three quarters (75%) of UK investors allocate to HY credit with a strategic focus or a blend of strategic and tactical approaches. Similarly, 7 out of 10 investors adopt a mainly strategic or mixed approach to their EMD allocations.

Ed Harrold, Fixed Income Investment Director, Capital Group said: “As monetary policy inflection nears, high quality bonds are becoming increasingly attractive. With yields near decade highs, UK bond investors have a rare opportunity to strengthen their defensive allocations and secure attractive yields. As divergence between economies increases and dispersion across different areas of the bond universe grows, a selective and active approach is crucial in capturing opportunities where spreads remain compelling.”

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