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Altaf's Perspective - Fixed Income Outlook for 2022 Revisited

We’ve reviewed our 2022 Fixed Income Outlook. As the Russian/Ukraine conflict continues, our position remains intact – with some caveats for institutional investors. Altaf Kassam and Des Lawrence share their insights.

April 29, 2022

Altaf Kassam, CFA

EMEA Head of Investment Strategy & Research

Build A Better Bond Portfolio
Where to Look, What to Do in 2022 — Revisited
Des Lawrence
Senior Investment Strategist
Investment Strategy & Research EMEA

Speaker: Altaf Kassam, EMEA Head of Investment Strategy & Research

The Muslim, holy month of Ramadan is famously a time for fasting, but it's also a time for reflection. And when I look back over the last year to the previous Ramadan, it's clear that the world has changed a lot since then. And the world of investing has changed a lot too, especially for fixed income as an asset class. Now our base case is still for GDP growth to be positive, but we think that it's going to be closer to trend rather than above trend, which is what we'd thought earlier on in the year. And we do think inflation is eventually going to come down. But again, we do think that it's going to stay higher for longer now in 2022, before starting to come down in 2023. We also think that there's too many rate hikes being priced in by the market and that these aren't all going to come to pass. Eventually central banks are going to bump up against lower growth and that's going to cause those rate hikes to be dialled back. But we have seen at the same time, the relatively rare event of an issuer being ejected from the emerging market debt index. And that's really brought to the fore for a lot of investors, the risks that are in a lot of riskier investment products in fixed income. For example, emerging market debt, and also high yield, where we see corporations starting to feel the effects of inflation as well as supply chain pressures. Now we've remained positive on both of those asset classes, but we know that investors are really starting to think about the risk and return trade off of higher yield versus the specific risks that I mentioned before. So a lot of this lies in the hands of inflation and whether the infamous wage price spiral is going to come to pass and how much corporations will be able to pass on the effects of higher prices and the supply chain pressures through higher prices, in other words, how much they'll be able to sustain their margins.

So what to do? Well, we still do think that there's value at the short end. As I said, we think there's been too many rate hikes priced in, but you're subject there to short term inflation noise. Over the medium to long-term, again, we do still continue to favor emerging market debt and high yield, but we have to bring to bear, bring to mind rather those specific risks that I mentioned before. Finally, long duration treasuries do still play a good role. They haven't worked so far in this inflationary environment that we've seen over the last few months, but if we start coming up against lower growth and worries about policy mistakes and eventual recessions, then we believe they will be the solid hedging asset that they have been in the past. If you do want more information on this, please do look at our updated fixed income outlook. Ramadan Mubarak.

www.ssga.com/ic/insights/fixed-income-build-a-better-bond-porfolio-revisited

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