Fixed income chief says world is leaning heavily on US for growth, which should be a concern
Rising interest rates and the flood of assets out of emerging markets mean investors should be shoring up their portfolios, according to a doyen of fixed income.
The Bank of Canada maintained its benchmark interest rate decision last week at 1.5% as it continued its plan to raise rates steadily.
But Aubrey Basdeo, BlackRock’s head of fixed income, said that even if investors looked beyond the flattening of the Canadian yield curve, the uncertainty in the global economy means they should be anticipating a bumpier ride.
He said: “Just looking at the uncertainty factors around, for example, emerging markets are having a tough time and assets are flowing out, which is leading to slower growth.
“When we look at global growth overall, it’s still relatively healthy but the issue with that is that most of that health is because of the US.
“The resolution of the emerging markets all slowing down, including China as a developing economy, [is that] you have to ask yourself, how is this likely to play out? Either the US slows down and is dragged down by the rest of the world or somehow the US is able to drag the rest of the world upwards.
“The uncertainty around how that plays out suggests alone that you should be adding more resilience to your portfolio.”
Throw in the fact central banks are removing accommodation, Basdeo said, and this only strengthens the argument. He added that investors should be on alert for signs that a slowdown in the economy is going to be “unruly”, meaning higher defaults.
Basdeo believes that while a recession will mean equity markets will be suspect, investors must also protect themselves in the fixed income asset class by focusing on the short end of the curve.
He said: “The flatness of the yield curve would suggest that the short end of the curve is where you should be thinking about your exposure given how much they have risen relative to long rates.
“So, from an information ratio or a risk-adjusted basis, you’re much better owning the two-three year part of a curve than the 10-year part of the curve, just because there is so much volatility and you’re not getting compensated for the risk that you’re taking.”