With the potential retrenchment in quantitative easing measures in 2018, we move into ‘uncharted territory’ for fixed income capital markets as central bankers, politicians and investment managers face an economic and investment environment not previously experienced.
Positively, how capital markets react will be influenced by the fact, institutional asset owners – pension plans, insurers, endowment, foundations and so forth - have a decreased reliance on developed world debt to drive returns due to growing allocations made over recent years to multi-credit / multi-asset class funds and the growing confidence in EM debt. All this gives reason to remain mildly confident even if interest rates don’t rise beyond their recent movements.
Undoubtedly, the last 10 years since the (repetitively referred to) Financial Crisis has seen a plethora of new asset classes emerge. More so and given the lessons learnt from the events of 2017 and 2018, these products, including DGFs and private market loans, are built on a premise of transparency. The clear change in culture in the City of London and other financial market hubs, away from hubris at short-term performance towards close examination of risk-adjusted returns, has enabled a confidence amongst long term investors to not panic at short-term market fluctuations. This also says something about the reduction in equity market volatility through 2017.
So as quantitative easing gets cut back, institutional investors will be more diversified in their holdings, and the outlook for the European and U.S. economy does look rosier than it has in a long time. Even in China, President Xi’s growing influence and continued drive to make the Chinese economy less dependent on foreign investment, engenders a belief that China as the influencing force over much of the emerging world will ensure for years to come.
Therefore, central bankers may choose to take the advantage of these fundamentals and initiate a withdrawal of stimulus measures. Maintaining low interest rates is certainly not the desired outcome from 2018 that pension plans and insurers want. However, institutional investors increased exposure to real economy assets could see them through.
Release of the Fixed Income Investment Strategies report is imminent, in lead up to the Institutional Fixed Income Investment Summit to be held on 7th June, 2018.
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