Fund managers see hard currency as key to growth in 2014

Managers of bond funds are pessimistic about sovereign debt and optimistic about high-yield bonds and view rising interest rates as a threat in 2014, according to a survey from Aviva.

Fund managers see hard currency as key to growth in 2014

The Aviva Investors Multi-Manager Fixed Income Survey asked fund managers with around £2 trillion of assets under management for their views on markets.

Fund managers were asked about return expectations and likely macro-economic influences for 2014. The respondents were based in the UK, US, continental Europe and Asia-Pacific.

Close to half of respondents expect negative returns for sovereign bonds over next 12 months and half of respondents expect high yield to return between 5% and 10%.

Hard currency emerging debt – debt issued by emerging market countries but denominated in “hard” currencies such as the US dollar and the euro – was expected to return between zero and 5% in 2014 by 73% of respondents, with the remaining 27% expecting returns to reach 5-10%.

Fifty four per cent expected high yield bonds to return between 5-10%, with 89% of respondents expecting zero to 5% returns in 2014 for corporate bonds.

For sovereign bonds, reduced government spending was listed as the biggest opportunity in 2014 (26%), followed by improving tax revenues.

Yield compression – limitation of the appreciation potential for a bond in a depreciating interest rate environment – was listed as the biggest opportunity for corporate bonds (39%) followed by improved balance sheet strength (31%).

Rising interest rates were deemed the biggest risk facing both corporate and sovereign bonds.

This year 58%% of respondents said rising interest rates was the biggest risk for corporate bonds, up from 35% in 2013. Low absolute yields fears were allayed slightly this year, with 12% suggesting that they were the biggest risk facing corporate bonds, down from 30% in 2013.

For sovereign bonds, rising interest rate concerns rocketed by 46%, with 69% listing this as the biggest risk for the sector.

However, government indecision – which was a source of concern for 17% of the 2013 survey respondents – was no longer a worry amongst respondents.

Ian Aylward, head of multi-manager research at Aviva Investors, said: “It’s clear that managers are expecting low returns from almost all fixed income assets this year.

“Almost half expect negative returns from government bonds, with high yield being the only category expected to deliver more than 5% by the majority of respondents. Corporate bond returns and emerging market debt returns are expected to fall between these two extremes.

“We remain of the view that equities offer better value than bonds and this stance would appear to be supported by the very low expected returns across fixed income.”

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