Recession has trumped stagflation as the most pressing risk over the next five years in the latest Russell Investments poll of global fixed income managers.
The Russell survey of global bond and currency managers found just over 20 per cent of respondents ranked stagflation as the number one mid-term concern compared to more than 40 per cent at the end of last year.
Over the same period global recession worries took over from stagflation as the biggest worry, rising slightly to 40 per cent – or about double the figure recorded in the June quarter survey in 2022.
But managers are also increasingly concerned about a “major repricing” in risk assets with the factor almost quadrupling to above 20 per cent quarter-on-quarter, equaling stagflation in the Russell fear gauge.
The study also found respondents were upbeat on the Australian, Japanese and Euro currencies while expecting the US dollar and UK pound to be the worst-performing over the next 12 months: the NZ dollar rated as the third-worst in the manager 12-month currency performance expectations.
Russell global head of fixed income, Gerard Fitzpatrick, told NZ investors during a roadshow earlier this month that the survey shows the rapidly rising interest rate regime as well as related events such as the US bank collapses and UK gilt crisis have “clearly taken” bond managers “by surprise”.
However, Fitzpatrick said fixed income managers expect rate-hikes to peak soon – especially in the US – while they are “getting less bearish on credit spreads” and positive about emerging market currencies, in Latin America in particular.
Overall, he said following “a painful bear market in global bonds” last year that saw double-digit losses “the asset class is looking attractive again” with much higher yields on offer and “hopefully some diversification”.
Bonds have been positively correlated with equities since about the start of the COVID-19 era in March 2020 following a long period of roughly neutral or negative correlations.
Global bonds “offer the prospect of higher long-term returns and greater alpha opportunities” compared to NZ fixed income given the much larger and diversified opportunity set, Fitzpatrick said.
The Bloomberg Barclays Global Aggregate Index represents some 4,000 issuers, 29,000 securities and over $106 trillion compared to the respective figures of 50, 180 and $188 billion for the NZ fixed income market.
Fitzpatrick manages the flagship Russell Global Fixed Interest strategy, which has attracted more than $1.3 billion from NZ investors including $500 million through a portfolio investment entity vehicle.
Russell controls about a third of the global fixed income portfolio in-house (sharing credit and government bond duties) with the remainder split among BlueBay Asset Management, Schroders and Western Asset Management.