Investors are entering 2019 with an expectation that the US Federal Reserve is looking likely to raise its benchmark interest rate two more times this year. While the four rate hikes in 2018 had been challenging for fixed income assets, we expect fixed income performance to improve in 2019.

In the current low but rising interest rate environment, global growth momentum is moderating but remains positive. A strong job market and relatively healthy household balance sheets are supporting US consumers. Relatively low corporate financing costs and strong profits are helping to sustain US capital expenditure growth.

  • Securitised credit, such as asset-backed securities (ABS), is still supported by the current US consumer confidence.
  • High-yield bonds also remain resilient. Credit fundamentals are improving where strong US earnings growth is feeding into lower leverage and higher interest coverage ratios.

When the global economy moves deeper into the late cycle, the bouts of market volatility from heightened trade tensions and monetary policy normalisation suggest that investors may want to focus more on the search of income than on purely capital gains.

Having said that, being predominantly risk-off could be a bad idea as this tends to be detrimental to returns. A slow rotation from an aggressive portfolio to a more defensive portfolio is likely the more suitable answer. A common defensive move to consider is a greater investment weighting in fixed income.

While the current global growth momentum continues to benefit some of these fixed income assets, investors should still adopt a more agile approach with the flexibility to diversify across different fixed income asset classes1 as the economic cycle evolves.

1 The above recommendation is for illustrative purposes only, exact allocation of portfolio depends on each individual’s circumstances.

Investment involves risk. Investors should consult professional advice before investing. The opinions and views expressed here are those held by the author as of the date of this publication, which are subject to change and are not to be taken as or construed as investment advice.

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