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
"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.
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