Monthly Market Perspectives

Speaker : Altaf Kassam

2022 is coming to an end, but it has been a painful year for most investors. But there is a silver lining as we look into 2023, and that is coming in fixed income, which now actually gives you income. So we are not quite there yet in terms of peak rates, but we do think that inflation is about to peak. We see a disinflationary impulse coming. And so that means we might see peak rates in the US and then in Europe sometime in the first half of 2023. And then opportunities will really start to open up in fixed income.

So fixed income is moving from TINA (There Is No Alternative) to TARA (There Are Reasonable Alternatives). And if we look at those alternatives, starting with cash, we now have a positive interest rate. Cash can be used as an offensive asset, as dry powder, when opportunities open up, and as a defensive asset, as a buffer, against inevitable market volatility.

Developed market government bonds used to be low-return risk but now are more low-risk return, and especially in the eurozone, bunds, even when you compare them to US Treasuries, hedged back to euros, are offering a really decent yield. Investment grade, as we move up the risk spectrum, we think, gives a really good risk-return trade off and is kind of in the sweet spot right now. And when we look at high yield, we do worry about defaults, but even when we make reasonable assumptions about their size, you still get a relatively attractive return. And high yield is coming into its own as a liquid sleeve to use with private assets. And we think liquidity is going to be all important in 2023.

Finally, emerging market debt. For that to really work, we think a couple of things have to fall into place. China needs to get off its knees and the dollar needs to turn. Again, we are not quite there yet, but the signs are looking good. So, as we look into 2023, we think fixed income is really the place to be. But a few things need to fall into place and investors need to be patient. With that thank you very much and I look forward to speaking to you again in 2023.

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The views expressed in this material are the views of the Altaf Kassam, CFA, EMEA Head of Investment Strategy & Research through 9 December 2022. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
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Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
International Government bonds and corporate bonds generally have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns.

Investing in high yield fixed income securities, otherwise known as “junk bonds”, is considered speculative and involves greater risk of loss of principal and interest than investing in investment grade fixed income securities. These Lower-quality debt securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.

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