We believe a mild recession is still on the cards. Both the consumer and corporate sectors have relatively strong balance sheets, but in recent data releases we have seen a modest deterioration in economic data, and we expect this to continue as the year progresses and we start to see more of an impact from interest rate hikes. We are expecting consumption to slow as we see signs of the support from excess savings decline and headwinds, such as the recommencement of student loan repayments, arise. The US labour market is still very tight, but the demand/supply imbalance has eased and, notwithstanding September’s strong figures, we are seeing a trend of a reduction in non-farm payrolls. Inflation is still high but reducing with respect to core goods. Shelter inflation is slowing with the methodological lags we have previously highlighted. Core services inflation remains the focus for central banks.
The combination of robust consumption, tight labour markets and sticky inflation has resulted in interest rate cuts expectations in the US to be pushed out to mid-2024, along with recession expectations. We have a long duration position in our strategic bond portfolios. Presently we have 8 years duration (US 3.25 years, UK 1.5 years, Europe 2.5 years and New Zealand 0.75 years).
Credit spreads, the additional yield above the comparative sovereign bonds, have tightened since their post Covid zenith in October 2022. Even with recent rates market volatility, credit spreads have held in well. We believe credit spreads, as well as the total yield available in corporate bonds, are attractive for long-term investors but we do expect market volatility to create buying opportunities later in 2023. Our strategic portfolios currently have exposure to investment grade and high yield bonds of 50% and 20% respectively, levels that we deem to be neutral. We believe the aforementioned volatility, caused by the impending recession, could provide a good buying opportunity and is a time when we would look to increase our aggregate credit exposure.
To download the full quarterly strategy commentary, please click here.
KEY RISKS
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
The Funds managed by the Global Fixed Income Team:
Consider environmental, social and governance (""ESG"") characteristics of issuers when selecting investments for the Funds. May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund. Hold Bonds. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay. May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. May, under certain circumstances, invest in derivatives, but it is not intended that their use will materially affect volatility. Derivatives are used to protect against currencies, credit and interest rate moves or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions. The use of derivatives may create leverage or gearing resulting in potentially greater volatility or fluctuations in the net asset value of the Fund. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead. The use of derivative contracts may help us to control Fund volatility in both up and down markets by hedging against the general market. The use of derivative instruments that may result in higher cash levels. Cash may be deposited with several credit counterparties (e.g. international banks) or in short-dated bonds. A credit risk arises should one or more of these counterparties be unable to return the deposited cash. May invest in emerging markets which carries a higher risk than investment in more developed countries. This may result in higher volatility and larger drops in the value of the funds over the short term. May be exposed to Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails. May target an absolute return. There is no guarantee that an absolute return will be generated over the time period stated in the fund objective or any other time period.
The risks detailed above are reflective of the full range of Funds managed by the Global Fixed Income Team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
DISCLAIMER
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.
