During a recent Satrix IndexMore online event, ‘Bonds Are Back: Debating Fixed Income and Yields’, Karim Chedid, Head of the EMEA Investment Strategy team at BlackRock, provided insights on the global economic landscape and the impact of upcoming elections on global trading, interest rates, and the US dollar.

Global Bonds and Market Sentiment 

Chedid highlighted the renewed interest in fixed income markets. Following continued market enthusiasm in the technology sector and strong performance from equities, it is no surprise that global bond indices have struggled to capture public attention. However, with inflation surging post-COVID and central banks raising rates, bonds have started to offer something to yield-starved investors, albeit still flat on a real basis.

"Fixed income does not mean fixed returns," Chedid noted, emphasising the capital risk component inherent in these instruments. He acknowledged the potential for rewards in the current environment, where rate cuts are increasingly likely towards the latter part of the year.

US Economic Outlook and Interest Rates

Addressing the state of the US economy, Chedid explained that strong wage growth and consumer spending have kept the US economy robust, delaying expected rate cuts. "We started the year with the market pricing seven cuts for the US Fed by the end of 2024, yet none have happened. The market is now pricing four cuts by year-end," he explained.

Chedid expressed that while inflation is expected to fall towards the Fed's target by year-end, structural drivers such as ageing demographics, labour supply tightness, and fiscal spending will keep inflation from declining significantly. "Higher rates for longer is here to stay," he asserted, though he noted that bonds remain attractive for income rather than massive total returns.

Impact of Global Elections on Economic Policies

Chedid also discussed the potential impact of global elections on economic policies, particularly in the US. With a significant number of elections occurring globally this year, the outcomes are expected to shape future rate expectations and sovereign debt management. He emphasised the importance of positioning in an election year rather than trying to predict specific outcomes.

"Regardless of who wins the US presidency in November, fiscal spending is likely to be inflationary," he said. He highlighted that sectors such as technology, financials, and US industrials are well-positioned to benefit from ongoing fiscal spending and AI build-out.

Geopolitical Fragmentation and Inflation

Chedid pointed out the trend of geopolitical fragmentation as a structural driver for long-term market returns. He described it as the fragmentation of supply chains, where countries continue to trade but through more intermediaries, leading to increased inflation. "Countries will still trade with each other, but there will be more middle countries in between," he said, using the example of the US-Mexico-China trade dynamics.

This fragmentation, he argued, is inflationary and presents investment opportunities in regions like Mexico, India, and Southeast Asia, which are poised to benefit from shifting supply chains.

Outlook for Bonds and Investment Strategies

Despite the complex global economic landscape, Chedid remains cautiously optimistic about the bond market. He noted a shift in investor comfort towards taking on duration risk, particularly in European fixed income, and continued interest in high-yield segments.

"Bonds are back for income and carry," he concluded, advising investors to focus on long-term positioning rather than trying to time the market based on short-term election outcomes. This is exactly the philosophy that Satrix has been championing in South Africa since introducing the nation’s first Exchange Traded Fund back in 2001. 

Disclaimer

Satrix Investments (Pty) Ltd is an approved FSP in terms of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision.

Satrix Managers (RF) (Pty) Ltd (Satrix) is a registered and approved Manager in Collective Investment Schemes in Securities.

While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSPs, their shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaim all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information. 

© 2024 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, and iSHARES are trademarks of BlackRock, Inc. or its affiliates All other trademarks are those of their respective owners.