Half Of Fixed Income Investors Predict End Of Economic Cycle By 2021

Invesco's Global Fixed Income Study found 49% of fixed income investors expect the economic cycle to end by 2021, while 27% of investors believe the almost decade-long bull market will see its end within a year.

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The survey of 145 fixed income specialists and CIOs across EMEA, North America and Asia Pacific with combined AUM of $14.1tn also found wholesale investors were more bearish than their institutional counterparts with 65% expecting the cycle to end within two years.

From a regional perspective, North American investors expect the end to come even sooner than two years, while APAC investors are convinced the expansion is on track for the next year or two. Investors in EMEA are the most optimistic that it could well last beyond one to two years.

Head of Europe, the Middle East & Africa for Invesco Fixed Income Nick Tolchard said politics in the US is likely contributing to the "pessimistic outlook" for North American respondents.  

He explained: "Elevated rhetoric from the Trump administration regarding trade with China, Europe, Canada, and Mexico, plus actual tariff impositions, have significantly impacted optimism.

"From a policy and markets perspective, perceptions that the Fed remained determined to remove policy support, and speculation of the potential for the yield curve to invert, would have added to concerns."

Invesco also found respondents were predominantly concerned with high levels of indebtedness, in particular government debt, with regard to the trigger of the next downturn.

In face-to-face interviews, investors surveyed also said a rising interest rate environment will have a significant impact on interest costs and default rates.

Top among other sources of potential disruption was a crisis in emerging markets, followed by a debt bubble in China.

Despite concerns, fixed income investors believe the end of the market cycle will have a bigger impact on equity markets than their own asset class.

However, 60% of investors said they have a stronger view that credit spreads will widen over the next three years and 45% said the yield curve will remain flat for a prolonged period of time.

Meanwhile, 35% of fixed income investors have fewer concerns about rising inflation and 27% expect an inverted yield curve in the next few years.

Invesco said concerns have benefitted Chinese fixed income allocations as investors "look through trade war and geo-political issues in their search for yield and diversification", with 32% of investors intending to increase their allocations to China over the next three years. The trend is particularly pronounced among North American investors, with 58% saying they plan to increase Chinese exposure.

However, US investors are currently less likely to hold Chinese fixed income products as part of their portfolio due to a greater home bias in allocation strategy. 

At a global level, 51% of investors see Chinese assets as a longer-term strategic decision that will be underpinned by the increased weighting of China in major fixed income indices expected in 2019 and beyond.

Invesco found total foreign investment into China's fixed income market rose "rapidly" in 2018.

Respondents said the barriers to investing in Chinese fixed income, such as government intervention, and potential restrictions on capital movements, are coming down and prompting them to take advantage.

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Tolchard said: "While last year's relatively unified view of the ‘new normalization' scenario largely came to pass, investors are now increasingly uncertain due to the growing list of potential risks, from both a geopolitical and markets perspective.

"As a result, fixed income investors are actively re-positioning fixed income portfolios to be better positioned to handle a variety of outcomes.

"Interestingly, fixed income investors across the globe are considering a wide variety of portfolio strategies: some are targeting yield; some are seeking the safety of shorter durations or cash in case volatility spikes; and some want the flexibility of floating rate instruments. With there being so many factors consider, it demonstrates how investors need a variety of solutions to deal with the potential risks."