With higher interest rates likely to extend well into 2024 and beyond, now is the perfect time to consider fixed-income allocations within client portfolios, especially as the prospect of a recession lurks.
Apart from the U.S., most economies appear to be struggling with higher interest rates and elevated (albeit cooling) inflation. This is undeniably hampering global GDP growth with both Chinese and European growth engines, which contribute 18% and 12% respectively to world GDP, slowing materially.
Likewise, the Japanese economy contracted 2.1% in the third quarter, far more than expected, whilst in the United Kingdom, the Office of Budget Responsibility (OBR) just slashed its economic forecast for the next 2 years.
In Australia, GDP growth is modest, inflation remains stubbornly high, and the prospect of further rate hikes seems plausible.
Unsurprisingly, survey results released from Reuters last week reveal that a majority of economists expect weaker global GDP growth in 2024 than previously expected.
Restrictive Policy Settings
While interest rates have likely peaked in Europe, the U.K. and potentially in the U.S., they are likely to remain elevated over the short-to-medium term as inflation takes longer to normalise.
In such an environment, we think corporate fixed-income can play a pivotal role in generating consistent and stable returns for your clients, with coupons on some securities offering between 7-8% per annum.
While credit risk for highly leveraged corporates is a concern, especially for those refinancing maturing debt which was previously secured at ultra-low rates, we believe that established companies with strong balance sheets are well-positioned to withstand any shocks.
Time In The Market
While investors may find it tempting to avoid all potential risks and sit in cash, given the current returns on offer, it’s worth highlighting that these returns, accounting for inflation, are net negative. Additionally, it’s important for clients not to become overly reliant on cash given the increased reinvestment risk.
As the saying goes, it’s all about time in the market not timing the market, and we believe that certain high quality corporate fixed-income securities are offering the perfect balance between capital preservation, and consistent and stable returns.
While rates are expected to remain elevated over the near-term, it’s less certain further out. This is why we uphold the view that securities with a 3–4-year maturity are currently providing investors with the right balance between risk and return.
However, with such an extensive universe of investment opportunities available, it’s important to speak with a corporate fixed-income specialist so you can provide your clients with the best advice possible.
How the Australian Bond Exchange Can Help
For more information about the specific corporate fixed-income securities which we currently have on offer, or to learn more about how fixed-income can benefit your clients’ portfolios, speak to adviser at the Australian Bond Exchange today.
Disclaimer: Australian Bond Exchange Pty Ltd ACN 605 038 935 AFSL 484453 (ABE). This article is intended to provide general information of an educational nature only. It does not constitute the provision of personal advice and does not take into account your personal objectives, financial situation or needs. Before investing with ABE, you should consider the appropriateness of the investment to your particular financial and taxation situation and consider obtaining independent advice before making an investment. Examples in this article are for illustration purposes only and are not a recommendation to buy, sell or hold a particular investment. ABE makes no representation or guarantee as to the availability of a bond with the characteristics described in this article or that an investment made by you will generate the returns in the illustration. Past performance is not an indication of future performance. Investing with ABE is subject to our Client Services and Custody Agreement Terms and Conditions and Financial Services Guide.