by ASILA JALIL / pic by TMR FILE
GLOBAL bond investors seeking higher returns may want to look beyond fixed income and dive into other asset classes during the low interest-rate environment.
Franklin Templeton Fixed Income CIO Dr Sonal Desai said fixed income is always going to have a place in an entire portfolio but the current situation enables investors to look into other asset classes and having more exposure to equity than previously.
“We are looking at sectors which would potentially benefit from the steepening of the yield curve because we still think we are going to see the steepening of the yield curve from its current level.
“As such, we are looking at those inherently lower duration asset classes and alternatively very intrinsically higher yielding emerging markets (EMs),” she said during Franklin Templeton’s 2021 mid-year outlook webinar yesterday.
Desai said the group also currently favours EM high-yield bonds.
Although valuations have been “stretched”, she viewed it as cyclical adding valuations were already stretched pre-pandemic.
Investors, however, should still have traditional low risk bonds within their fixed income investments, she said, and noted there is value in higher yielding EM market debt.
“I do think there needs to be a place in your strategy to have those lower risk pieces within the fixed income spectrum but by having said that, we continue to see value in higher yielding EM debt,” she said.
The expectations for the US Federal Reserves (Fed) to taper in the next two months will not have a substantial impact on EMs, says Brandywine Global portfolio manager Anujeet Saree.
He noted EMs are in a better position now compared to 2013, when there was a taper tantrum episode after the Fed signalled it would end its quantitative easing programme.
“We are less worried about a potential taper tantrum affecting the EMs. Last time we went through this back in 2013, their trade deficit was in a much worse shape, real interest rate was lower and their currencies were overvalued.
“None of those things are true today. Their real interest rates have been on a forward looking basis, trade balances are in a great shape for many EMs and currencies are quite undervalued.
“I think they are a little bit more insulated from that risk,” he added.