Uncertainty Reigns Supreme for Fixed-Income Investors in 2015
Investing is always full of uncertainty, but 2015 is shaping up to be a year of paradigm shifts for fixed-income investors.
Specifically, the US Federal Reserve looks set to raise interest rates for the first time in many years. China’s economy, long an engine for global economic growth and a shock absorber for economic crises in the West, appears to be full of strife. In addition, the other members of the BRICS also look beset by economic challenges. A lesser issue is the possibility of default by some sovereign and quasi-sovereign debt issuers, including Greece — though that is forestalled for now — and Puerto Rico.
The 2015 CFA Institute Fixed-Income Management Conference, taking place 22–23 October in Boston, will seek to illuminate these issues.
Effect of Rate Increases
Chief among the many dilemmas confronting fixed-income investors is the likely change in global central bank policies. In this space, the big gorilla is the Fed, which is committed to a rate rise by the end of 2015. What’s more, other central banks look set to follow suit, especially the Bank of England. What effect will this have on the US dollar, on the British pound, on commodities prices, and on global capital flows? You guessed it: The answer is uncertain. At the CFA Institute Fixed-Income Management Conference, many speakers will be discussing this topic, including Stephen G. Cecchetti, former economic adviser of the Bank for International Settlements; James Grant, of Grant’s Interest Rate Observer; and Karin Kimbrough, managing director at Bank of America Merrill Lynch.
Chinese Economic Cracks Appear
What triggered the titanic decline in Chinese equity prices and the subsequent global reevaluation of China’s economic prospects? There are many theories. Some say it was the devaluation of the yuan. Others say it was a long overdue correction in response to worsening economic conditions. The Chinese government itself says that nothing is wrong and that the decline was due to foreign interlopers and interlocutors. Whatever the cause, the downturn in China led to global selloffs in many markets, a temporary rethink of the health of the global economy, and a recognition that China may be unable to fulfill its role as turmoil shock absorber, as it did in the aftermath of the Great Recession. Daniel J. Fuss, CFA, vice chairman of Loomis, Sayles & Company, and Joyce Chang, global head of research at JP Morgan, will both discuss this uncertainty at the conference in Boston.
Broken BRICS
Aside from China, the preeminent member of the BRICS, there is turmoil among the remaining nations, too. In Brazil, a global commodities slowdown and price collapse triggered a recession. Meanwhile, Russia is crumpling under the severity of the economic sanctions leveled against it for its incursion into Ukraine. India’s great hope, Prime Minister Narendra Modi, has yet to implement many of the policies that were central to his election campaign. In South Africa, electric power is unreliable and hampering economic growth, and many doubt the integrity of President Jacob Zuma. Again, uncertainty in these nations will be the focus of several speakers at the Fixed-Income Management Conference, including John H. Carlson, CFA, a portfolio manager at Fidelity Investments, and Ronald G. Layard-Liesching, chairman of Mountain Pacific Group.
High-Profile Defaults
Though Greece did not default on its loans in the most recent chapter of its ongoing debt drama, does anyone out there think that its economic and debt problems are truly resolved? I didn’t think so. Greece is not alone in its economic turmoil, however. Puerto Rico defaulted on its debts recently. In particular, James Grant last year touted the debt of Puerto Rico as interesting. It will, of course, be good to check back in with him about that recommendation. And while no default appears imminent, Abenomics in Japan looks like it is failing to trigger the kind of inflation that was anticipated by its prime minister architect.
I look forward to seeing you next month. Please stop by and say hello!
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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