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“Periods of volatility in the fixed income credit markets have historically presented investors with unique investment opportunities. In the face of uncertainty, having a flexible approach to investing and a keen focus on value and fundamentals is important in adapting to change.”
Markets Rocked at an Unprecedented Magnitude and Pace
Global economies nearly ground to a halt in March 2020, as public health concerns drove rapid implementation of extreme preventative measures intended to focus on containment. Oil prices plummeted to 20-year lows, responding to the global demand shock resulting from the economic shutdown, as well as the supply shock of a Saudi Arabia/Russia price war. In financial markets, anxiety over an uncertain future and an acute dash for cash drove wholesale liquidation across most asset classes. Credit spreads began to widen during this period of market volatility, eventually peaking for most credit sectors on March 23.
Volatility, An Opportunity
Periods of volatility in the fixed income credit markets have historically presented investors with unique investment opportunities.
- Spread sectors have often become oversold due to fear-based demand dislocation, which has been driven by heightened investor pessimism and risk aversion among financial institutions.
- These environments can increase opportunities for active managers to exploit inefficient markets with a focus on longer term value and fundamentals.
- Investors who entered the US corporate credit markets during extreme spread peaks in October 2001 and December 2008 realised robust total returns in the years ahead. Of course, past performance is no guarantee of future results.
For example, in the chart below:
Investment grade corporate bonds returned a cumulative 18.62% in the two years following a spread peak in October 2001. The high yield corporate bond market rose 97.69% cumulatively in the 24 months following its historic December 2008 spread peak.
The recent volatility reflects a liquidity squeeze, not expectations for prolonged credit destruction. The US government and Federal Reserve are engaged in an unprecedented and massive stimulus programme to stabilise the market and support households, businesses and state and local governments. We believe more support is likely to come. We anticipate further spread compression and believe investors are being well compensated for risk.
Positioning for a Rebound with an Active Multi-Sector Fixed Income Portfolio
In the face of uncertainty, having a flexible approach to investing and a keen focus on value and fundamentals is important in adapting to change. A value-driven, multi-sector approach can respond to different economic, credit and rate environments, taking specific risks when the markets pay for these risks and reducing risk in markets that do not offer compelling value.
- A multi-sector approach means investing across a broad range of fixed income asset classes, including non-benchmark sectors. Placing different sectors side by side, capital is allocated based on how well each should perform within the current investment climate.
- With a value-driven approach, investors can capitalise on valuation differences among fixed income sectors and securities when seeking out relative value.
When Experience, Discipline and Consistency Matter
- At Amundi, our first actively managed multi-sector fixed income strategy was launched in 1978.
- The team, led by Ken Taubes, CIO of US Investment Management, has maintained the same investment philosophy and process for 20-plus years, demonstrating a heightened degree of consistency and discipline. Our strategies are well positioned and diversified across fixed income sectors to capture any rebound as the crisis abates and risk-aversion declines.
- Lastly, as investors seek higher income from their fixed income portfolios with controlled volatility, our team continues to manage clients assets with a total return objective.
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For distributors and financial advisors only. This document is issued by Amundi Singapore Limited (Company Registration No. 198900774E) and is for information only. The information contained in this document neither constitutes an offer to buy nor a solicitation to sell a product and shall not be considered as an investment advice. While reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, Amundi Singapore Limited makes no representation as to its accuracy or completeness. Opinions expressed in this report are subject to change without notice. We do not accept liability whatsoever whether direct or indirect that may arise from the use of information contained in this document. Amundi Singapore Limited, its associates, directors, connected parties and/or employees may from time to time have interests and or underwriting commitments in the securities mentioned in this document. Past performance and any forecasts made are not necessarily indicative of the future results. All investments carry certain elements of risk and accordingly the amount received from such investments may be less than the original invested amount. This document is not intended for citizens or residents of the United States of America or to any «U.S. Person», as this term is defined in SEC Regulation S under the U.S. Securities Act of 1933.The information contained in this document is deemed accurate as at 31 July 2020. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.
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