ATLANTA, March 18, 2019 — Invesco today released findings from its second annual Global Fixed Income Study, an in-depth report outlining sentiment of fixed income investors globally. The study reveals: half (49%) of respondents expect the economic cycle to last another one to two years, while many North American investors (52%) see the cycle ending earlier; 58% of North American asset owners plan to increase allocations to China over the next three years; and investors are grappling with how to incorporate Environmental, Social and Governance (ESG) principles into fixed income portfolios and measure the impact.
“Investors believe we are quite late in the current economic cycle, but we found they are not foreseeing a significant correction in fixed income, and rather expect the rare event of a soft landing with a continued flat yield curve,” said Rob Waldner, Chief Strategist and Global Head of Multi-Sector Portfolio Management, Invesco Fixed Income.
The study was conducted through face-to-face interviews with 145 CIOs and fixed income asset owners across North America, EMEA and Asia Pacific responsible for the fixed income components of portfolios totaling USD $14.1 trillion in AUM (as of June 30, 2018). Respondents included defined benefit and defined contribution plans, sovereign wealth funds, insurers, private banks, ersified fund managers, multi-managers, and model builders. Key findings include:
The end of the cycle
- With the current economic expansion running for nearly ten years – one of the longest on record – some investors are nervous about its further longevity and are alert for triggers that could end it. The most common view among participants (49%) is that the end of the cycle is one to two years away, however more than a quarter (27%) see an end sooner, within the next six months to one year. Expectations on the duration of the cycle differ significantly between regions. More than half of North American investors expect the cycle to end in the next twelve months, while more than 75% of Asian investors expect the cycle to continue for a year or more.
- When asked what might trigger the next downturn, survey participants were predominantly concerned with high levels of government debt, though they also saw several sources for potential disruption emanating from the global backdrop, including trade wars. Despite these relatively high levels of concern, most expect the economic cycle will end in a soft-landing, with a correction in the equity markets more likely than a significant sell-off in bonds. With this backdrop, investors have a strong view that credit spreads will widen over the next three years (60%) and that the yield curve will remain flat for a prolonged period (45%).
“Growth risks are skewed to the downside, but our clients seem fairly confident that the next recession won’t be nearly as bad as the last,” continued Mr. Waldner. “Because of this view, they’ve invested in higher quality bonds and scaled back risk, but they are also looking for the slowdown to reset asset prices that may have been artificially inflated by central banks. And, they’ll likely take that opportunity to add at higher yields.”
Chinese fixed income exposures on the rise
- Chinese fixed income allocations are set to grow as investors look through trade and geo-political issues in their search for enhanced yield and ersification. Recognizing that China is underrepresented in bond portfolios, especially given its role in the global economy and the size of its debt market, one third (32%) of fixed income investors globally intend to increase their allocations to China over the next three years. In the US, investors are currently less likely to hold Chinese assets in their fixed income portfolio but are most likely to be increasing allocations (58%) despite rising trade tensions. For half (51%) of global investors, this is a longer-term strategic decision that will be underpinned by the increased weighting of China in major fixed income indices expected in 2019 and beyond.
- Engagement levels have been low, and barriers still exist in the form of access limitations, local currency risks, the threat of government intervention and limited transparency. But with the prospect of higher yields and lower correlations to developed markets, combined with higher weights in fixed income indices over time, there should be a structural tailwind for investing in China.
“There is a growing fascination with China as an investment destination, given its sheer size and economic heft, but also given its rapid market liberalization and growing list of highly successful corporations,” noted Julie Salsbery, Business Strategy – Investments, Invesco. “While index inclusion will definitely accelerate both awareness and investment, China is still classified as an emerging market and will therefore likely be subject to bouts of volatility.”
ESG fixed income moves into the mainstream
- ESG investing is moving from a niche investment approach taken by a minority of asset owners to becoming part of mainstream fixed income investment processes. The primary drivers of ESG within fixed income include perceived benefits to risk management, the potential for enhanced returns, and growing interest from stakeholders. That said, significant adoption issues remain as survey respondents grapple with a lack of reliable data, dispersion of views on the principles-returns trade-off, and a limited number of capabilities and products seen as suitable to their needs.
- The level of commitment to implementation varies widely, but larger funds are more likely to have made a firm commitment, built specialist-ESG teams, and be engaging directly with companies. Regionally, EMEA continues to lead the charge with 76% of respondents having an overall ESG commitment policy and 51% considering ESG factors within their fixed income portfolio. North America’s commitment to ESG is growing, but still lags with 44% having an overall commitment and just 38% considering ESG within their fixed income portfolio.
“Interest in ESG investing continues to evolve from simple negative screens where portfolios exclude certain industries, to an integration of ESG factors into risk/return analysis for each asset, to positive screening and impact investing,” continued Ms. Salsbery. “With few hard-and-fast rules and definitions, and only nascent regulation, ESG investing requires active management and active engagement with each client to ensure their unique objectives are being met.”
Invesco Fixed Income is one of the world’s leading fixed income managers with offices in all global financial centers singularly focused on uncovering and delivering value for clients.
To access full findings of the Global Fixed Income Study or to learn more about Invesco Fixed Income, please visit www.invesco.com.
About Invesco Ltd.
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Sample and Methodology
The Field work for this study was conducted by NMG’s strategy consulting practice. The breakdown of the 2019 interview sample by investor segment and geographic region is available in the report.
Survey participants’ experience may not be representative of others, nor does it guarantee the future performance or success of any product. The opinions expressed are those of NMG and are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. There may be material differences in the investment goals, liquidity needs, and investment horizons of inidual and institutional investors. Invesco is not affiliated with NMG, an independent full-service market research provider, specializing in wealth management and financial services market research and consulting.
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