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Will 2023 be the year of fixed income?

Karan Talwar, Desmond Soon, Tina Yu, Leonard Kwan
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Investment teams at Western Asset Management, Pictet Wealth Management, Barings and T. Rowe Price tell Asian Private Banker about their top picks for a defensive fixed-income portfolio for 2023.

“2022 has seen an unprecedented bear market for fixed-income investments and extraordinary financial turbulence. However, emerging from the storm, for the first time in decades, valuation for fixed income is attractive,” Desmond Soon, head of investment management, Asia (ex-Japan) at Western Asset Management, said, adding that, in his view, next year is a once-in-a-decade opportunity for fixed-income assets.

“Fundamentally, fixed income will be boosted by declining inflation in the coming year, even though it may take a considerable period before CPI reaches the 2% goal of central bankers. Technically, strategic investors that have been underweight bonds for some time are likely to take steps to increase fixed income allocations given more compelling valuations,” he added.

First (safer) choice: IG credit

Among all fixed-income solutions, investment grade (IG) is expected to see the first round of valuation comebacks, according to Tina Yu, head of fixed income, discretionary portfolio management at Pictet Wealth Management.

“Asia IG is expected to make a comeback and post positive returns in 2023 as this space looks attractive for both spread and yield investors,” Yu said.

“There is a chance of UST [US Treasuries] yields falling and the long end to steepen, which will support total return. The Asia IG market, as it remains one of the better performers, offers a stable value proposition with solid fundamentals supported by strong local demand, favourable economic policies and ample liquidity,” Yu added.

Shorter duration bonds have been a popular trade as this helps to minimise the volatility of interest rates. “For portfolios, we stick with our active duration management, which allows us to mitigate interest rate risks and better position portfolios whenever the tightening cycle is completed, potentially adding low cash price long-duration bonds,” she said.

High yield: still worth exploring?

On the other side of fixed income investment, Pictet WM is cautious on the high-yield (HY) space as it is “extremely volatile and we are careful to balance the risks and rewards”, according to Yu. Some asset managers still see outperformance potential in HY space, but not without thorough selection.

“Given the highly idiosyncratic risk involved, managers need to be extremely selective, have deep knowledge and conduct extensive due diligence into individual issuers before investing in the distressed space,” Soon said, believing that “the quality of the U.S. high-yield market is the best it’s been in decades as fallen angels downgraded from investment-grade during Covid-19 put a tremendous amount of BBs in the high-yield index.”

A global HY strategy also secured “a reasonable allocation from the wealth segment” in Asia.

“Our global high-yield offerings tend to have quite a strong allocation across Asian investors. If you’re looking at Asian investors, they can make up almost up to half of the general funds,” Karan Talwar, senior director of Barings’ credit team, told Asian Private Banker.

“However, I would say that in the last eight months, the central bank hiking cycle started to tighten inflationary pressures, which impacted even the developed bond markets quite significantly and then mainly as we started seeing quite a lot of troubles with some of the headlines such as China property names,” Talwar added. He believes a global HY strategy could provide a decent diversification for the new year.

He also noted the importance of holding a shorter-duration strategy.

“Strategies that have tended to be shorter duration have generally held up better. For example, a global senior secured bond offering tends to be a slightly shorter duration, so it has lower interest rate sensitivity versus broad high yield bond market or the investment-grade bond markets,” Talwar said.

EM value has emerged

“Opportunities have been seen more widely in Asian emerging-market (EM) bonds. We have not seen this yield level in at least 10 years, so it’s an interesting time to be able to take the opportunity to have a decent income from fixed income finally,” Leonard Kwan, portfolio manager of dynamic emerging markets bond strategy and co-portfolio manager of the Asia credit bond strategy for T Rowe Price, said. Indonesia, South Korea and India all have the support from stronger investment momentum.

Source: T. Rowe Price

This year, the EM corporate bond index is down around 12%. “Index yield surpassed 10-year wides and spreads are cheaper but not dislocated,” Kwan added.