Based on the view the interest rate cycle has peaked, the Sarasin multi-asset team has moved from a slightly underweight to an overweight stance in investment grade corporate bonds and is reviewing its exposure to selective alternative assets.
Tom Kynge, deputy fund manager at Sarasin & Partners, said from the end of June the team have been selectively adding to investment grade bonds to reflect its view the worst of the interest rate rises is now over and that spreads offer good value.
“We have been positive on better-quality corporate bonds, known as investment grade bonds, for some months now,” he said. “These are bonds issued by companies that have robust businesses and reliable cash flows, and so are less likely to fail to make interest payments or repay loans.”
While the peak in the rises may be over, Kynge said the expectation interest rates will stay higher for longer has made these bonds more appealing in terms of the balance between risk and return they offer over the medium term.
“Buyers of bonds today are able to benefit from yields that are higher than at any time since the Global Financial Crisis of 2008,” he said. “For bond buyers, the combination of higher yields and relatively low credit risk is highly attractive, creating a supportive market for good-quality bonds.”
Outside of corporate bonds, Kynge said the team has also reviewed its exposure to alternative assets that have similarities with equities and bonds, including infrastructure which was one of the worst performing markets as interest rates rose.
“We believe it is time to revisit this sector, which offers good long-term potential as a result of urbanisation, modernisation and the transition to lower-carbon economies,” he said. “We also favour assets that are likely to perform well in response to the persistent inflation that underlies the outlook for higher-for-longer interest rates.
“Commodities are an obvious choice here, with oil and other hard commodities, such as gold, tending to do well during periods of inflation,” he added. “Longer term, these holdings are likely to benefit from rising commodity prices caused by geopolitical tensions and climate change.”
On the flip side, Kynge said higher rates can increase economic risks, for example making it more expensive for a company to borrow money to expand its business, or simply keep the business going.
“As this dynamic works its way through the global economy, investment markets will adjust to reflect the new normal – and this will make for more volatile markets,” he said. “In this environment, investors should consider the benefits of hedging strategies that can help protect portfolios, or even enhance returns.”
