David Leduc, manager of the BNY Mellon Global Strategic Bond Fund, says recent headlines in the financial press indicate that most major developed market central banks are preparing to pursue additional monetary policy stimulus measures in an effort to jump-start their economies.
“These headlines also indicate that not everyone believes additional measures are necessary or prudent,” says Leduc. “In fact, it’s clear that not all central banks believe this. The European Central Bank continues to maintain a stable policy, unwilling to pursue any quantitative easing measures. This seems to be a risky policy stance in the face of continued difficulties in the peripheral Eurozone economies and the various austerity measures being implemented.”
Comments from the US Federal Reserve, as well as the Bank of England and Bank of Japan, have indicated the likelihood of additional monetary easing – although Tuesday’s better-than-expected UK GDP numbers are likely to lead to less clamour for further quantitative easing, in the near term at least. However, in the case of the Fed, Standish believes additional stimulus could be significant.
“Meanwhile, among the G-4 central banks, only the ECB seems to have a clear and consistent hawkish bias. We believe that there are two clear investment implications of further monetary easing: a weak US dollar and strong performance from risky assets,” Leduc says.
“Against this backdrop, we believe corporate and other credit assets will perform well over the coming months. Many issuers maintain strong earnings with solid balance sheets and risk premiums will benefit from more policy stimulus,” he explains. “Despite the prospect of further liquidity being pumped into the system, core inflation numbers in most advanced economies remain comfortably within policy targets. As such, there seems to be little risk of a severe upside surprise to inflation expectations in the intermediate term.”
Standish maintains its positive view of investment-grade corporate bonds, as company fundamentals remain strong, while the prospect of continued declines in corporate defaults should bode well for the high-yield market.
Meanwhile, at the country level, it retains exposure to both Spain and Italy; the latter has benefited from improved fiscal policy measures, along with more positive market sentiment.
“Given their current valuations, along with continued developments
among the peripheral European countries, we believe these positions are reasonable at this time,” says Leduc.
“At the same time, our currency stance remains little changed; we continue to favour exposure to a basket of currencies with strong fundamentals and growth differentials over the US dollar. In particular, we see opportunities in certain emerging market currencies, high beta currencies, and in countries with more commodity-based markets.”