Bob Jolly, Head of Global Macro, Schroders

Global macro outlook and tactical approach

Amidst ongoing Eurozone concerns and uncertainty surrounding Spain, Schroders’ Head of Global Macro, Bob Jolly, discusses his tactical approach in light of his outlook for the global fixed income markets…

The risks to growth expectations could go either way, so we expect markets to remain nervous and levels of volatility to remain elevated. We believe the best approach in this environment is to trade tactically instead of taking any significant strategic positions.
 
However, we are still taking a strategically positive view on the prospects for US growth. We are less bullish about the US economy than we were a month ago, but expect it to continue to provide some positive surprises. Meanwhile, we expect Asia to continue to outperform expectations and Europe to remain the laggard.
 
Credit remains a major focus and bias in the Schroder ISF* Strategic Bond, with a particular emphasis on the US, and we are positive about our basket of top credit picks. Mindful of volatility, however, when options are attractively priced we will continue to buy protection on the names we own via index options.
 
Following the strong rally this year, we think valuations in global credit markets are now much closer to fair value and the spread on financials reflect the support offered by the LTRO. However, we expect investors will seek credit exposure more because of the higher yields on offer (carry) than because of any expectation that spreads versus government bonds will compress significantly.
 
On a country basis, we think France is the eurozone member currently most vulnerable to political risk and the risks surrounding the implementation of austerity measures due to its upcoming presidential election. Spain also remains at risk, but with Spanish banks holding plenty of liquidity post LTRO, it is relatively attractive versus Italy where banks and the government will likely need access to capital sooner and larger size.
 
We think the US and UK are likely to take the greatest risks with regards to inflation, due to the debt dynamics in both countries. Both have high levels of nominal debt and real assets dominated by property and equity. Deflation would be fairly disastrous for both counties leaving the central banks prone to keeping monetary policy at an extremely accommodative level for too long. We reflect this through a combination of curve steepening and short duration biases.

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