Press releases / Investment views

High Yielding Bonds most attractive Fixed Income Opportunities in 2012 in face of uncertain market outcomes

Against a backdrop of fragile and dispersed growth and significant policy headwinds on the fiscal side, ING Investment Management (ING IM) believes that these high yielding asset classes will benefit from continued healthy underlying fundaments, improving corporate confidence and data surprises and strong conviction of its bottom-up analysts.

Valentijn van Nieuwenhuijzen, Head of Strategy, ING Investment Management says: “2012 will continue in much the same vein as the tail end of 2011, populated by the well-known challenges that remain for the global economy and instable financial markets. We predict that policy direction will remain uncertain in the problem zones, including Europe, US housing and Chinese real estate. Caution is needed when it comes to investor positioning and sentiment, with a clear underweight tilt towards risky assets and depressed return expectations for the year.”

The asset manager expects the global economy to grow by 3% in the coming year - well below its long-term potential, with around 2% coming from Emerging Markets. Factors affecting the developed world include the Euro crisis, on-going deleveraging of households and the financial sector. The aim to consolidate government finances will generate more fiscal tightening and, thereby, depress growth opportunities in developed market economies.

ING IM highlights that, as these three factors are likely to interact with one another, they are difficult to forecast. Furthermore, the impact from each factor is likely to differ from one asset class to another with Euro denominated assets being more influenced by system dynamics in the financial systems in the Eurozone. Meanwhile, globally diversified spread products and Emerging Market-related assets will be more sensitive to the global cycle.

Valentijn van Nieuwenhuijzen continues: “The willingness by global investors to take on risk could impact all different types of asset classes. Risk premia are still relatively high everywhere, even in treasury markets. Many perceive the latter to be over-valued, but the current steepness of G4 treasury markets still reflects significant risk premia that could re-adjust if investor sentiment turns.

“It is important to realise that uncertain times not only come with significant amounts of volatility, but also a host of exciting opportunities. However, asset allocators will need to be flexible and dynamic in order to exploit this. Currently, it might well be that despite the lingering Euro crisis – by far the biggest tail risk – some tactical investment opportunities are building.”

Elsewhere, support for Emerging Market assets has weakened and hard currency debt markets, in particular, has lost much of its lustre having been the preferred spread product for most of 2011. The asset manager says that the turn in cyclical pulse for Emerging Markets has also disappointed over recent weeks, with return and inflow momentum being particularly slow.

Valentijn van Nieuwenhuijzen concludes: “The current fixed income situation means it is highly unlikely that current allocation stances will last for the whole of 2012. The environment the market finds itself in at the start of 2012 demands that investors should be dynamic and therefore investors should react to new opportunities and be prepared for unexpected shocks. This means that tactical movements are indispensable to exploit shifting return expectations amongst asset classes.”

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