As 2016 comes to a rapid conclusion, the annual inundation of wrap-ups and prognostications is in full swing. ’Tis the season of giving, so indulge me while I add one more yule log to the fire.
Earlier this year, I wrote about the need for fixed-income investors to better understand geopolitical risk, refocus on fundamentals, and incorporate their economic expectations into the investment process. So post-Brexit/Trump/Italian referendum/Fed move, how have my views evolved over the rest of what has been the strangest year in recent memory?
Geopolitical Risk (And/Or Return?)
We are not out of the woods, friends. The first quarter of 2017 alone will see President-elect Trump’s inauguration (and what should be a Tweet-heavy first 100 days in office), the potential for further populism via the Netherlands general election, and the probable invocation of Article 50 to formally start the Brexit process (barring a Supreme Court decision that would only add to the confusion).
The remainder of 2017 brings elections in France and Germany, a new National Congress in China, major regional elections in India, and potential for ongoing governance issues in Brazil, Italy and South Africa. Oh, and by the end of 2017, we’ll assuredly be talking about the 2018 midterm elections in the U.S. (thank you, 24-hour news cycle!).
So what does that mean for fixed-income investors? As in real estate, it’s all about location. More than simply understanding their portfolio’s current exposure, savvy investors should actively seek geographic tilts based on market attractiveness. The U.S. looks strong relative to other G20 countries (taking the real estate piece one step further, it may be the best house in a bad neighborhood).
For global investors, identifying credits with material exposure to the U.S. market should see outperformance in terms of favorable spread movement, upgraded potential based on improved issuer financials, or via currency carry (yes, carry is back).