Beyond the Bond Benchmark: A multi-sector bond strategy filtered for opportunity rather than indebtedness
Many investors have traditionally used products that track the Bloomberg Barclays U.S. Aggregate Bond Index as their core fixed-income allocation. As we enter a new rate regime, investors may need to adjust their fixed-income portfolios to avoid overconcentration and minimize interest rate risk. Additionally, the benchmark index does not foster diversification with a two-thirds weighting to government affiliated bonds and high correlation between the largest sectors. This investment strategy commentary highlights why investors should consider a multi-sector bond strategy filtered for opportunity rather than debt.
After close to four decades of declining interest rates and central bank policy rates hitting zero, the combination of quantitative easing policies, low inflation and tepid growth has driven sovereign bond rates to historic lows. The best case today is that rates remain stubbornly low, but there is also the risk that a new reliance on fiscal stimuli could create budget strains that could drive inflation and rates higher. Sourcing income and managing potential income volatility in this new rate regime presents unprecedented challenges for both fixed-income and equity investors.
The confluence of arguably the best demographic profile (a young, rapidly growing population) and an enlightened leader successfully initiating meaningful reforms is producing growth in India that leads the world. India stands out among emerging market (EM) countries as the fastest growing EM country over the next five years. This rapid economic growth can continue to be achieved through three key pillars of support: consumption, investment and reforms. This investment strategy commentary explores these key pillars of support and why India is poised to be the next great emerging market.
The emerging market (EM) consumer theme is not new, and research on this long-term trend suggests that it should endure. Based on our own calculations, the quantum of EM consumption surpassed $13 trillion in 2015, with growth accelerating from 2003 onward. As such, we believe that harnessing the EM consumer opportunity should be central to most emerging market investment strategies.
The scope and demographics of the global middle class are reshaping the global economy in the 21st century. These changes have just begun. A new global middle class is emerging. Reaching the middle class is not just an aspirational benchmark, but signifies when consumption levels begin to grow exponentially. The size of the global middle class is projected to increase from 1.8 billion people in 2009 to 3.2 billion by 2020 and to 4.9 billion by 2030 - and 85% of this growth comes from Asia. Learn about Driving Growth in Emerging Markets
Smaller, less developed non-BRIC Emerging Market (EM) and Frontier Market (FM) economies - i.e., non-BRIC developing countries - have the potential to generate growth. However, investors face challenges accessing these investment opportunities due to the trade-off between portfolio liquidity and diversification. In Passing the Baton, we identify and explore investment opportunities in the non-BRIC developing countries, which could offer the growth and diversification characteristics that are missing in mainstream EM indices today.