UK asset owners optimistic on fixed income opportunities

74% of UK asset owners are bullish on fixed income prospects for the coming year, a study has shown.

The research by fund manager Capital Group has revealed that as interest rate cuts are anticipated before the year-end, 51% of UK asset owners are extending the duration of their bond portfolios.

Additionally, 28% express confidence in increasing credit risk exposure, underlining a cautious yet discerning approach among investors. This confidence translates into a belief that active strategies will outshine passive ones across all fixed income sectors in the next 12 months, particularly in high yield credit and emerging market debt, shared the researchers.

Investors foresee bonds and equities becoming more negatively correlated

Among the key trends highlighted in the study is the preference for US and European bonds over domestic ones. A significant 75% of investors plan to either increase or rebalance their allocations to investment grade  corporate credit in the coming year, with US IG corporate credit and the eurozone being favoured over UK counterparts.

According to the findings, the growth in high yield and emerging market debt markets has elevated their strategic importance. 75% of UK investors allocate to high yield credit with a focus or a blend of strategic and tactical approaches. Similarly, 7 out of 10 investors said they adopt a mainly strategic or mixed approach to their emerging market debt allocations.

Fixed income ETFs hit record inflows in 2023

According to the research, investors view US and global IG credit as the most attractive opportunities in credit markets. Notably, US IG credit (28%) is perceived to offer more favourable prospects than European IG credit over the next 12 months, amidst a more robust economic outlook in the US.

Ed Harrold, fixed income investment director at Capital Group, emphasised the attractiveness of high-quality bonds amidst approaching monetary policy inflection. He stated: “With yields near decade highs, UK bond investors have a rare opportunity to strengthen their defensive allocations and secure attractive yields. As divergence between economies increases and dispersion across different areas of the bond universe grows, a selective and active approach is crucial in capturing opportunities where spreads remain compelling.”

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