Fixed income outlook for 2015

Oil prices are proving a key talking point in the fixed income space, having dropped $30 since the summer as a result of increased supply, a stronger dollar and disappointing global growth.

In the US, this drop in the cost of oil means a $120 billion windfall for the consumer, meaning that retail spending should be supported by cheaper gasoline prices, says Ben Bennett, credit strategist at Legal and General Investment Management.

While this creates potential for companies that can benefit from discretionary spending in the US, consumers elsewhere will be less fortunate, owing to weaker currencies such as the euro and yen.

The outlook is also more challenging for sellers of oil such as the US shale oil industry and the energy sector could suffer as commodity prices fall, writes Bennett, in Legal and General’s fixed income focus report for December 2014.

In an outlook report from Robeco for 2015, Léon Cornelissen, chief economist, says that if low oil prices persist “it will be a clear boon for the world economy”.

This could produce an uptick in global economic growth and also encourage Iran and Russia to adopt a more appeasing stance towards the West, as they struggle with government finances.

Declining commodity prices have also had an impact on emerging market debt, with commodity exporters weakening as importers strengthen.

Latin American countries, such as Brazil and Colombia, have been under pressure, but Russia has felt the hardest knock, having already had to cope with sanctions in response to the Ukraine crisis.

Oil importers, such as Turkey, India and China, have benefited from the price drop. Bennett at Legal and General says India’s structural reforms, following the election of Nerendra Modi to prime minister, mean that the firm is “happy to take investment opportunities even if the oil price decline starts to reverse.”

At Schroders, James Barrineau, co-head of emerging market debt relative, also says that despite some problems, emerging market debt could still produce satisfactory returns, relative to the global fixed income universe.

He adds: “Relative to history, currencies are inexpensive and local rates are very attractive relative to developed markets.”

Colm McDonagh, head of emerging market fixed income at Insight Investment Management, says that the developed world is now pursuing weaker currencies to avoid downside risks to growth and inflation.

At Insight, the preference is for local rates markets and a net short position in emerging market currencies. He adds: “Low developed market yields mean demand for the higher yields available in emerging markets will continue.”

©2014 funds europe



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