Liquidity vs. Credit Quality, or both?Some fund managers’ base case projections predominant forecast core inflation to trend lower but linger above central bank targets for a few quarters in the United States, Europe, and some other developed economies. This journey to central bank targets may also be bumpy and could include a slight reacceleration in core inflation in the coming months. Consequently, the likelihood of experiencing at least a mild recession before central banks get inflation back close to target levels may be higher than 50%.Given the uncertain economic trajectory, some fund managers are actively prioritizing the enhancement of credit quality within their Income portfolios. At the same time, they are striving to maintain sufficient liquidity to purse resilience and flexibility in the face of this uncertainty.Diversifying the portfolioAlso, some fund managers are optimizing the flexibility to invest across various credit qualities, sectors, geographies, and maturities.This approach allows them to take advantage of compelling yields offered by high-quality assets, with potential downside resilience and price appreciation even during a recession. The anticipation is that global volatility will continue into 2024, creating favorable conditions for some proactive fund managers.Furthermore, some fund managers have capitalized on market dislocations in high-quality assets resulting from fear or abrupt shifts in economic expectations. They have particularly focused on higher-quality and liquid securitized market segments, such as agency mortgage-backed securities (MBS), to leverage the ongoing market volatility.What are being avoided?Some fund managers have made strategic adjustments in their investment approach of fixed income strategies, they have shifted out of lower-rated and more economically sensitive corporate credit – which has limited covenants to support investors – while a bit more neutral on investment-grade corporate credit.Additionally, caution is exercised in the senior secured loan space as these loans have floating interest rates, leaving borrowers – many of which are smaller, heavily leveraged companies – facing sharply higher debt service costs. The credit fundamentals in this sector may likely deteriorate, leaving it a vulnerable area of the market in the event of a harder landing.Furthermore, some fund managers have reduced their exposure to emerging markets over the past few years and shifted their focus towards more defensive sectors, such as agency mortgages and other structured products.With the Fed approaching the end of its tightening cycle, some fund managers perceive the U.S. dollar as overvalued against various global currencies, including some in emerging markets. Consequently, some fund managers are using the small position in emerging markets as prudent source of diversification for the overall investment strategy.Remarks: This article is only aimed at giving an overview on some fund manager’s strategies in general. For investment strategy of particular fund, investors should refer to the relevant offering documents.Importance NoticeThis document is for general information only. The information or opinion herein is not to be construed as professional investment advice or any offer, solicitation, recommendation, comment or any guarantee to the purchase or sale of any investment products or services. This document is for general evaluation only. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person or class of persons and it has not been prepared for any particular person or class of persons.
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