Peter Bentley
The Fed, constrained by tariff-driven inflation, should deliver a modest rate cut in late 2025 before embarking on a more decisive easing cycle in 2026 in response to economic slowdown.
Until we have greater visibility on the outlook, and given spreads are relatively tight, we believe a defensive stance remains appropriate in credit. Within that framework, we continue to identify opportunities in less cyclical sectors like utilities and telecommunications providers, and by exploiting regional divergences. For example, Europe’s fiscal expansion and China’s stimulus are expected to support regional growth, offering diversification opportunities. Our investment regime framework points to a more challenging period ahead and has been guiding us to position accordingly. Although spreads have tightened, yields remain more attractive than a few years ago.
Focus on quality and resilient cashflows
This leaves us with a bias towards investment grade credit and government bonds within those mandates where we have the flexibility to take a more defensive view.
But that doesn’t mean we don’t see opportunities to add value. Less cyclical sectors such as utilities offer attractive spreads, and relative insulation from global tariff risks, as they typically operate within domestic markets. For these companies, the primary concern is of a broader economic slowdown. This can be mitigated by focusing on companies with predictable and resilient cashflows that can typically withstand economic volatility. Telecommunications providers can exemplify this resilience, as consumers prioritise mobile services over other expenses, ensuring steady demand even during economic downturns.
Emerging market franchises offer spread premium
In the hunt for strong domestic franchises with tariff resilience, it may also be the perfect time to broaden the search. With the appropriate expertise, many such opportunities can be found in the emerging world. These companies, which issue debt in US dollars, often dominate their domestic market but their developing market status means they trade at a yield premium. Telecommunications providers in Latin America serve as a prime example for those seeking to take advantage of the spread premium available in lower-rated credits.
European fiscal expansion creates regional tailwinds
There are also opportunities at an inter-regional level. The proposed relaxation of the German debt brake to allow greater defence spending, alongside a new €500bn infrastructure investment fund, is expected to boost growth across the eurozone. Arguably, fiscal largesse has been a critical driver of US exceptionalism in recent years, and Europe now seems ready to embark on a significant fiscal expansion. This is expected to underpin European growth and the outlook for a range of companies operating within the region.
Investors should be tactical and selective when re-risking
As the outlook clears, we may well start to tactically increase our allocation to lower-rated credits again. However, this is not the time to allocate to weaker CCC-rated credits; these issuers have the greatest leverage and will be most exposed to any period of low or negative growth.
This tactical shift will need to be considered in the context of broader macro conditions, including the evolving outlook for currency markets and rate curves.
Against this backdrop we expect to see a weaker US dollar and steeper yield curves. Selectivity and flexibility will be critical in credit markets. Our current positioning reflects a cautious stance, favouring high-quality issuers and defensive sectors with predictable cashflows. Yet we remain alert to opportunities – whether in resilient domestic franchises, undervalued BB-rated credits, or regions poised for fiscal-driven growth, such as Europe.
By Peter Bentley, Global Head of Fixed Income, Insight Investment
