Overview
Key takeaways
- There are growing signs that the US investment narrative is changing
- Fidelity fund managers see potential for emerging markets as the dollar falls
- After a US Treasuries gain, is it time to turn to gilts and Bunds?
“Until very recently, markets have been pricing in that the US economy will continue growing at 3 per cent forever. We had a very strong conviction that was not going to be the case,” bond fund manager Mike Riddell says in the new episode of Fidelity Answers.
“You hear a lot about how tariffs are a zero-sum game for the global economy. I strongly disagree with that,” he adds , laying out the case for a change in the global investment landscape in 2025. “Tariffs are a negative sum game.”
Listen to the Fidelity Answers podcast here
Dollar bill
Fidelity Answers takes the questions our clients ask us and puts them to a panel of experienced fund managers and analysts. Many investors want income from their investments just as much as returns. Yet as Mike and colleague James Durance explain, the result is the investment grade (IG) credit market has become overcrowded in the past year. A worsening of the economic outlook may make those trades look exposed while also creating opportunities to buy back in.
They have other answers too. As we enter March, the growth trades which drove US government bond yields to highs earlier this year have collapsed. Interest rates and yields have started to fall. And if yields have peaked, the dollar may have too. Traditionally, that would make EM debt among the asset classes to gain as the greenback retreats, buoyed by the reduction in US funding rates.
“Emerging markets have been loathed by most investors for the last 10 years, largely because the dollar has been so strong,” says Riddell. “One of the main drivers for EM currencies and local currency bonds is the dollar. If the dollar is going down, then emerging currencies tend to go up.”
Credit centric
Government bonds should be the go-to conservative option, but investors’ appetite for risk hasn’t entirely disappeared. Last month the average spread between US IG credit and government bonds - or the reward for the extra risk of holding them - was tighter than it had been more than 99 per cent of the time since 2006[1]. Corporate credit is traditionally the riskier side of the fixed income universe, but many investors still want to hold it, says Durance, who specialises in high-yield credit strategies.
“What's changed and what continues to change is the outright level of yields in the fixed income market. They are as high or close to as high as they have been in two decades,” he says. “People are very attracted to that.”
Niche plays
For the moment, Durance and the Fidelity debt analysts he works with are focused on finding pockets of value, deals, or segments of the market that can provide extra returns, whatever the weather.
The hard-currency debt of a number of emerging market governments, for example, has become less expensive - he cites Egypt and Panama are two leading examples. And while high-yield credit pricing in the US has been extreme, there are signs of that turning.
Fixed income analyst Jonathan Neve’s research and instincts have taken him to some less expected places in the past two years. For example, aircraft leasing companies whose ability to raise prices has benefitted from the shortfall in plane production of recent years.
“Received wisdom is that in less risky, less leveraged credits you may make a bit of return but you won’t make a lot. It’s a logical idea. Except, it’s not really true,” says Durance. “We have had some opportunities to buy fairly unrisky companies for very, very high spread valuations.”
Another area where a change in the sectoral weather could support an upgrade in valuations is alternative satellite providers to Elon Musk’s now highly valued Starlink, he adds.
A brighter Europe?
The change in the growth story dominates Riddell’s thinking for the months ahead.
“Everyone can construct a macro narrative, but what really matters is the valuations and does your view on what’s going to happen differ from what is already priced in,” he says.
“Everyone's portfolio positions were short treasuries, long dollar, long US tech and that was absolutely priced in. But the market is starting to think that US growth, maybe, isn't so strong.”
Would German government bonds be attractive after a sell off?
“They’re starting to be actually yes,” he says. “The bond market I like the most is actually here in the UK. British defence spending is already pretty much at the level that Trump is requiring, and unexpected additional supply is unlikely to be an issue.”
Hot and not
Where does that leave bond investors in 2025? From a macro perspective: softer growth with likely changes in central bank policy to come; and from a market perspective, credit spreads that look fully valued but where pockets of value can still be found.
Learn more – plus what our guests pick as their hot cakes and hot potatoes this month, along with some recommended reading – in the latest Fidelity Answers. Watch or listen.
