“Sovereign defaults will remain the major concern for markets in 2012,” says Andy Weir, Fixed Income Portfolio Manager at Fidelity.

“However, investors should be wary of tarring all bonds with the same sovereign brush. 2012 will be a year of threats and opportunities in bond markets and nimble fund managers can take advantage of situations where investor sentiment becomes detached from the fundamentals.”  

He suggests, for example, “the outlook for global corporate bonds is favourable as corporate balance sheets remain relatively robust, monetary policies are accommodative and these bonds offer attractive valuations on selective names.

“When selectively chosen, I believe corporate spread investment grade names can provide an attractive relative value proposition to low yielding AAA-AA government bonds. High-quality investment grade corporate bonds can offer many of the characteristics once associated with sovereigns. Generalised macro concerns have served to push up yields in corporate bonds across the whole credit spectrum, but crucially this has occurred while company fundamentals have remained basically sound. Many companies are now in a better position than their governments. They have kept their cost bases under control; they continue to have access to bank lending, even if terms have become tighter, and they have actively managed their own refinancing needs in the past two years to protect themselves from this kind of volatility. These factors should contain default rates at lower levels than the market appears to be discounting.

“While they entail more risk, high yield corporate bonds may prove to be attractive for investors prepared to take a longer-term view than myopic markets. High Yield balance sheets look in much better shape today, with leverage, coverage and liquidity metrics doing better now than in comparison to 2008 (10%-15% in prior recessionary period).”

Sector and stock selection is very important said Mr Weir. He added inflation linked bonds can also be attractive to fixed income investors.

“Inflation-linked bonds look rather attractive in the medium- to long-term, as inflation remains a significant tail risk. Although inflation is showing signs of cooling down, the tail-risk remains that developed market central banks continue to expand their quantitative easing program and reverse this ‘cooling’ period. I would expect index-linked bonds to outperform in this environment going forward.”
This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment. This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs.  You should consider these matters before acting on the information.  You also should consider the Product Disclosure Statements (“PDS”) for respective Fidelity products before making a decision whether to acquire or hold the product.  The relevant PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading from our website at www.fidelity.com.au. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Details about Fidelity Australia’s provision of financial services to retail clients are set out in our Financial Services Guide, a copy of which can be downloaded from our website at www.fidelity.com.au. © 2012 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity Worldwide Investment and the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited.

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