Trade conflicts continue to disrupt and weigh on global commerce – and that means active management is now king in fixed income.
Jean Charbonneau, senior vice-president and portfolio manager at AGF, said the liquidity-induced bull market and recovery from the 2008 crisis – and 2009 trough – has resulted in investors buying ETF-packaged bundles of good and bad companies from a defined market.
He believes we have now entered a different time, one in which active managers will need a better handle on top-quality companies compared to businesses who have a bad rating, are highly leveraged or are vulnerable to more rate hikes.
Charbonneau, who heads the fixed-income team at AGF, said the fact that many companies are affected by trade tensions means money managers have to be cute with their choices.
“Especially those companies that have global supply chains and those that are highly exposed to tariffs on steel and aluminum like the auto industries, and companies or sectors that are highly exposed to global supply chains,” he said.
“I think you have to be careful with these companies, especially if they are highly leveraged, so this means if you are getting more rate hikes by the Fed, it may have a meaningful impact on their balance sheet.
“For an active manager, from the bond perspective, they will look at companies that are more domestic oriented. They rely on the domestic markets like, say, in the US, the homebuilders, the financial sectors, utilities; the ones that don’t rely on the global supply chain.”
Charbonneau said that last week’s market volatility signified a regime change as a result of central banks pulling money out of the system through less quantitative easing and tightening interest rates.
This normalizing of monetary policy, he said, means there are opportunities if an active approach is taken and investors are not fixated on the 60-40 portfolio mix.
He said: “Usually there is an inverse correlation: whenever stocks would go up, bonds would go down and vice versa – the risk-on, risk-off type of equilibrium. So that relationship hasn’t worked well recently but we’re shifting away from a very accommodative monetary policy into a neutral monetary [stance] and, for advisors, it’s important to be well diversified. This creates opportunities when we get those periods of volatility.”
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