Eric Souders

Despite heightened geopolitical tensions, persistent inflation concerns and ongoing uncertainty around US monetary policy, fixed income continues to offer compelling risk adjusted return potential heading into the second half of the year, says Payden & Rygel managing director and portfolio manager, Eric Souders.

Markets have been forced to navigate a much more complex environment than many expected at the start of the year, Souders says.

“The US economy remains remarkably resilient, supported by strong consumer spending and what appears to be a generational upswing in investment, driven by AI infrastructure and power demand.”

While inflation has moderated from peak levels, he expects it to remain sticky and volatile in the near term.

“Our expectation is that inflation should trend lower over the next six to 12 months, but the path is unlikely to be smooth.

“The challenge for markets is determining whether inflation proves persistent enough to require a more restrictive policy response than is currently priced in.”

He believes the Federal Reserve is likely to keep rates unchanged for the remainder of 2026, despite market pricing that implies some probability of additional tightening. However, he cautions that the path is still uncertain.

“If the Fed does decide further tightening is required, it would probably involve multiple hikes, rather than a single symbolic move, to send a signal to markets.

“But our base case is that they do very little for the remainder of the year.”

Souders says attractive valuations, higher real bond yields and increased potential for monetary easing have boosted the appeal of international markets.

“We continue to see value in international (ex US) and emerging market fixed income. Beyond return potential, these markets now offer genuine diversification benefits not available to portfolios that are heavily concentrated in US assets.”

While private credit continues to offer attractive opportunities, investors should remain selective, Souders says.

“Not all private credit is created equal. The market has attracted significant capital over a relatively short period, much of it during an era of exceptionally low interest rates and optimistic growth assumptions.”

He remains concerned about quality and concentration risks within segments of the private credit market, particularly given the prevalence of lower-rated borrowers and significant exposure to technology and software sectors.

“When liquidity becomes constrained, investor anxiety can increase quickly. We believe there will likely be some challenging outcomes in parts of the market.”

Despite ongoing economic uncertainties, Souders believes the current yield environment presents one of the strongest opportunities for fixed income investors in years.

“Starting yield is one of the best indicators of future returns, and today’s yields are attractive across several segments of the market,” he says.

He nominates BB-rated US high-yield bonds, infrastructure, power, utilities, energy and commercial real estate debt as sectors he is bullish on.

Looking ahead, Souders believes investors should prepare for greater dispersion across markets and sectors rather than broad-based directional moves.

“There are reasons to be optimistic and reasons to be cautious. What matters now is identifying the areas where investors are being adequately compensated for risk.

“In this environment, active management is likely to be the key driver of outcomes, rather than relying on broad market exposure.”

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Eric Souders

The year ahead is shaping up to be a crossroads for global market investors, marked by continued uncertainty around economic growth and central bank policy, according to Eric Souders, portfolio manager at Payden & Rygel.

“Economic signals remain mixed. The US labour market has weakened, but demand has not broken. Growth continues to look resilient, supported by strong, technology-led investment,” said Souders. “Inflation in the US has declined, and we believe it can continue to improve, even as the outlook for economic growth remains uncertain.”

Despite easing inflation, policy uncertainty remains elevated, particularly in the US.

“The upcoming US mid-term elections later this year are likely to generate heightened and often extreme rhetoric,” he said. “Investors will need to strike a balance, being responsive to actual policy actions without becoming overly reactive to political noise.”

Souders expects the US Federal Reserve to remain on hold in the near term, noting that leadership changes will be a key factor influencing policy decisions.

“The Fed is entering a period where leadership transition becomes increasingly relevant, which limits the scope for near-term action,” he said. “We do not expect rate cuts before mid-year. While we believe the Fed will cut rates several times in 2026, markets are currently pricing in just one cut through the US summer.”

He added that bond markets are reflecting this uncertainty.

“The front end of the US yield curve is expected to remain relatively contained. However, we are cautious on the long end of the curve, which has been driven more by policy dynamics than economic fundamentals. In our view, investors are not being adequately compensated for the level of volatility they are assuming in the long end of the curve.” 

Looking ahead, Souders forecasts US economic growth of between 1 and 2 per cent, driven by a narrower set of factors.

“Wage growth has slowed significantly, and current immigration policies are contributing to a decline in population growth of around 1.5 per cent per year,” he said. “Together, these factors are weighing on the US economy’s potential growth rate.”

Souders believes elevated US policy uncertainty creates a compelling case for diversification into emerging markets.

“Globally, investors remain heavily overweight US assets, across equities, public and private credit, and real estate,” he said. “These assets are all ultimately reliant on a single driver: the US consumer. With labour markets softening and consumer sentiment under pressure, that concentration risk is becoming more apparent.”

“Emerging markets, by contrast, are less exposed to the US consumer. Inflation is largely contained, growth remains strong relative to developed markets, and valuations are attractive,” he added.

“These fundamentals point to a constructive outlook for emerging markets in 2026, and we expect them to perform well relative to developed markets.”

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Stephen Miller

Trump 2.0 remains the focal point as markets head into the second half of 2025. There is greater clarity around the implication of the US administration’s policies on markets, and despite the uncertainty and turbulence earlier in the year, global markets continue to price in a positive outlook for the rest of the year, according to GSFM and its fund manager partners Payden & Rygel, Munro Partners and Man Group.

“The advent of Trump 2.0 was always expected to make for interesting times in financial markets, and analysts who focused on the macro foresaw a dire scenario where tariff announcements would, at the least, make inflation ‘stickier’, pushing the Federal Reserve to adopt a conservative approach to policy rate reductions,” says Stephen Miller, investment strategist at GSFM

“Additionally, a lax approach to the budget deficit, which was already around 6.5 per cent of GDP, was expected to compound an already challenging bond issuance picture and see bouts of market indigestion that would at the very least prevent bond yields from falling and perhaps send them higher,” says Miller.

The recovery in risk markets since the post ‘Liberation Day’ lows in mid-April have been impressive and the S&P 500 has bounced circa 25 per cent from its lows, catching most analysts off guard, says Miller.

“Some of those elements have unfolded largely as anticipated but in some important respects elements of that scenario have gone awry.

“First, there is the ‘TACO’ (Trump Always Chickens Out) phenomenon, where the administration has walked back some of the more severe elements of the ‘Liberation Day’ announcements. Second, there is very little evidence in the hard data that the ‘stagflation-lite’ scenario is a clear and present danger. Inflation has been more quiescent than anticipated and activity has been more resilient.

“And lastly, macro-focussed analysts understandably tend to give substantial weight to macro variables such as interest rates, bond yields, and budget deficits, which underplay structural elements that can be big drivers of equity market performance.

“There is still a chance that inflation will prove ‘sticky’ and activity growth will be challenged but there are some big structural themes at work at the moment, like the rise of AI and technology, climate change, demographic shifts, deglobalisation and oligopolisation. These structural influences can have profound effects on equity market performance and when that is the case it is a particular opportunity for skilled stock-pickers,” says Miller.

Eric Souders, director and portfolio manager at Payden & Rygel, says that despite greater clarity around US policy developments and positive market sentiment, wage growth, labour market strength, and both nominal and real levels of growth in the US are all pointing to a slowing US economy.

“Compared to Q1 2025 trajectory, the US economy appears to be slowing. Wage growth has declined from mid to low single digits. The labour market has cooled, evidenced by a decline in job openings and less wage pressure. Inflation has also declined. The net result is nominal GDP likely in the three to four per cent range, which should slow nominal spending, corporate revenue, and corporate profits absent margin expansion.

“The US economic slowdown is happening in conjunction with a US policy mix that remains growth negative, given the combination of tariffs, immigration, and fiscal policy. To that end, a reacceleration in the US economy would likely require further easing in financial conditions, relaxation of the growth negative policy mix, or a productivity boom,” said Souders.

All the while, markets do not appear to be assigning much likelihood to a growth slowdown, which Souders says is particularly evident in equity pricing and 2026 earnings expectations.

“The US equity market is currently pricing in a very optimistic economic outcome, with forward multiples near all-time highs at 24x. Additionally, earnings growth expectations are suggestive of a strong economic outcome, particularly in 2026, where earnings growth expectations are near 13 per cent. The US interest rate market appears to be pricing an outcome that is more consistent with a soft landing, with two cuts from the Fed expected in the next six months.

“In general, fixed income yields in the five to six per cent range look attractive, particularly when compared to other markets that appear expensive, such as equities.

“With respect to portfolio positioning, we remain modestly cautious on price risk in credit given market pricing relative to the potential range of economic outcomes. Our favoured exposure within credit is emerging market debt and prime areas within the consumer category, such as US housing. We remain more cautious on the subprime consumer cohort and cyclical portions of the corporate sector, such as energy.

“Within interest rates, we are overweight interest rate duration relative to historic averages, and currently prefer more duration outside of the US, specifically in emerging markets, and are considering other developing markets like Canada and Europe. We also think the US dollar remains overvalued despite the 10 per cent plus weakening post Trump election,” says Souders.

With the US administration paying attention to whether the US economy will end up in recession, and what the domestic effects of the tariff agenda might be, Nick Griffin, chief investment officer at Munro Partners, says this strengthens his case to remain bullish about the US equity market heading into the second half of 2025.

“We remain bullish on the US equity market and believe US exceptionalism will resume and there are several indicators supporting this.

“Firstly, the US imposed tariffs were quickly rolled back to reduce the level of damage to the US economy. Secondly, we expect further rate cuts from the Federal Reserve, as hard economic data in the US is clearly slowing, and lower interest rates create a positive environment for growth equities.

“Lastly, and most importantly, fundamentals, specifically areas such as artificial intelligence, climate change and security, are all continuing to benefit from further investment, and in many cases investment in these areas is accelerating.

“What we are also seeing coming through are some of those structural changes that we believed existed for markets in 2025 driven by the Republicans winning the US election. These include the Big Beautiful Bill’s tax cuts, and also strong M&A and capital market activity, evidenced by several IPOs being offered to investors, and the subsequent strong performance of these listings.

“As we move into the second half of 2025, these structural changes will continue to evolve around us, presenting opportunities to invest in earnings growth.

“In particular, we believe more opportunities for investment will become apparent at the application layer of the AI stack. Companies are rapidly advancing the use of AI in their businesses, and as such we believe over the next several years more AI applications will be created,” he says.

Man GLG Asia Opportunities Fund portfolio manager, Andrew Swan, says the US tariffs have created an added layer of complexity in Asian markets, however a weakening US dollar and AI are contributing to a more favourable outlook for this market.

“The US-China trade tensions may see companies shift production bases to lower-tariff areas, which could lead to stockpiling in developed markets. Economic outcomes will depend on US-China trade negotiation results, as each industry tackles tariffs differently.

“China and Southeast Asian nations are expected to be some of the most affected by US tariffs, as Asian nations export heavily to the US. However, a weaker US dollar could help emerging nations in the region.

“Emerging markets are expected to do relatively well when the US dollar is weak. It provides a capital inflow into the region, particularly into the high-yield economies and it also allows central banks in the region to cut their short-term interest rates because the fear of currency depreciation and the inflationary impact of that starts to subside.

“That perhaps explains why markets in Asia have been resilient and continue to push to new record highs despite global politics, US tariffs and general weakness. The tailwind of a weaker US dollar is starting to permeate through markets.”

But he said this time around, China is very much exposed to the weakening US dollar.

“Chinese policymakers have been putting currency stability as number one priority for the past 18 months or so. That means running high real interest rates versus where perhaps the economy should be. So, anything that happens in the US is quite important for easing financial conditions in China, and more so than what we’ve seen in the past.

“It is a positive for the whole region, not just the smaller economies, but also the larger economies. And if perhaps this period of a weak dollar will persist, it will be a nice tailwind for the region,” he said.

According to Swan, the next phase of artificial intelligence (AI) could also benefit Asian economies and their stock markets.

“So far AI has been very helpful upstream in semiconductor companies, but we do expect that demand to now move downstream in the coming year or two.

“Whether we are talking about laptops, smartphones or other devices, once AI-driven innovation spreads to electronics manufacturing and stimulates product development, that will really benefit many Asian companies,” said Swan.

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Eric Souders

US growth is projected to decrease in the next two quarters of 2025, suggesting a potential economic slowdown, but according to portfolio manager at Payden & Rygel, Eric Souders, US equity and bond markets have yet to price this in.

“US economic growth is forecast to be about a one to one and a half percent over the coming quarters. This is below the growth rate trend, indicating a slowdown.

“This is being driven by the aggregate policy mix which is growth negative, and factors in the net impact of immigration, tariff and fiscal policies.

“Forward 12-month price-to-earnings valuations in the US equity market are running above 23 and higher bond spreads are in the bottom decile going back 25 years. We just don’t think that pricing reflects any sort of market recognition of a likely slowdown.

“The Federal Reserve is in a good position to prioritise growth over inflation in the coming months. The market right now is pricing around two rate cuts by the Fed, but we expect three or four more rate cuts by year end,” he says.

Given the outlook that US growth policy will effectively be running below trend relative to other parts of the world, Souders expects the US dollar to continue to depreciate, and for emerging markets to benefit.

“The latest depreciation of the dollar is not very material when you look at some of the moves it has experienced, both positive and negative, over the past 20 or 30 years. We think that has further room to go and it is clear to us that the US is a crowded trade.

“With the US growth policy effectively running below the trend relative to other part of the world, we expect the US dollar to continue to depreciate, which will benefit areas like emerging markets,” he says.

“Looking at the direction of capital flows, over the past 10 to 15 years US assets have collectively grown by around US$20 trillion, whereas in emerging markets, we’ve seen outflows for the last three years in a row.  So emerging markets is an area that has been quite underinvested by investors compared to the US.

Souders adds that current investors in US debt, like parts of Asia and Europe, are unlikely to increase their exposure, raising questions around funding.

“The US is running a significant deficit, around six to seven percent, and we don’t think it is likely to reduce. Servicing this debt currently equates to around US$2 trillion in funding that needs to be raised each year over the next couple of years.

“We won’t necessarily see overseas investors selling US assets, rather they will start to buy less of them, or will demand more compensation. This will likely lead to higher yields in the long end of the US yield curve, and could serve to gradually weaken the dollar further,” he says.

Souders says that given the outlook for the US economy, investors should be positioning their portfolios to be more defensive.

“Given the backdrop of the US economy, investors should be positioning more defensively today on the credit side.  This contrasts with where we were in the third and fourth quarter of last year, where we felt like the market was overpricing in the risk of a slowdown.

“In the current environment, investors should reposition to less credit and more on interest rate exposure in their portfolios, to take advantage of the market not pricing in enough rate cut expectations from the Federal Reserve.

“Interest rate risk is a nice hedge, whether that is a hedge to credit risk or equity risk in portfolios at a time of forecasted economic slowdown and market uncertainty,” says Souders.

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Eric Souders

The challenges fixed-income markets face are rising, with inflationary pressures potentially denting bond prices as US President Donald Trump proceeds with tariffs which could also depress global economic activity. These factors will play an important role in shaping the trajectory of bonds markets in 2025, according to Eric Souders, director and portfolio manager with Payden & Rygel. 

In a landscape of shifting economic forces and greater bond market volatility, ‘Bond Wars’ could unfold this year, and with that, a flexible and adaptable investment approach, or absolute return strategy, is required to deliver reliable income for investors and avoid capital losses on bonds, according to Mr Souders.

“As we move through 2025, the interplay of economic, fiscal, and political factors has created a landscape filled with both opportunity and risk for bond investors. We are likely entering a new regime characterised by higher volatility in interest rates, inflation, and credit spreads. The ability for portfolio managers to adapt, without being constrained by a bond benchmark, will become increasingly important this year in the face of greater uncertainty.

“Inflation dynamics remain in flux as a new US Treasury Department strategises the balance between fiscal and monetary conditions, and Trump’s second administration introduces important dimensions to policy and growth such as tariffs and US-focused policies,” he said.

Mr Souders favours the flexibility to invest in certain fixed income asset classes while avoiding others, which will be key for investors retaining their capital. 

“Market forces across the bond market can shift in both cyclical and structural ways. Cyclical shifts can occur rapidly, rendering forecasts outdated, increasing uncertainty, and driving price volatility across financial assets. Structural shifts typically take longer to unfold and require time to unveil unexpected plot twists,” he said.

Already this year, US government bond yields initially jumped, but have since fallen back to multi-month lows after results from a US manufacturing survey in March suggested slowing growth in the world’s biggest economy. 

“An absolute return fixed income strategy is important in the current uncertain environment, with greater volatility in bond prices,” Mr Souders said.

“The bond market is at an inflection point. Forces of light have been strong in the last two years, with solid growth, stable employment, and record-high asset prices. However, the dark side lingers as inflation remains elevated and bond market volatility is too high. Order must be restored as the key players in this saga aim to complete their various objectives.” 

According to Mr Souders, growth in the US has been above 5 per cent in nominal terms for seven out of eight quarters and above 2.5 per cent in real terms for seven out of eight quarters. Asset prices, including US equities and housing prices, are at or near all-time highs, while credit spreads are near 20-year lows, which all put downward pressure on bond prices heading into 2025. 

“The US economy is doing well and does not need more growth, with some arguing it could even benefit from less growth. Donald Trump’s victory in the 2024 elections was largely driven by voters prioritising the economy, particularly inflation, over asset appreciation or economic growth. Tariffs have only added to inflationary pressures.

“The Payden Unconstrained Bond team envisions a potential plot twist in the Bond Wars, where bond yields must rise before they can fall. A rise in yields, particularly in longer-term maturities, would tighten financial conditions and temper growth expectations. As a result, the Unconstrained Bond team prefers less exposure to the long end of the yield curve.

“Conversely, the team finds the front end of the bond yield curve attractive, with two-year interest rates just above the Fed Funds Rate and aligned with the US Federal Reserve’s reaction function to any deterioration in the labour market or growth,” he said.

Unlike core bond strategies, which are driven by market benchmarks, an absolute return strategy does not rely on a benchmark and typically starts with cash. This provides fund managers with greater flexibility to adapt to changing market conditions, focusing on reasonable returns relative to cash while prioritising capital preservation, according to Mr Souders.

“The question remains whether the new coalition within the red wave, helmed by US Federal Reserve Chair Jerome Powell, US Treasury Secretary Scott Bessent, and President Donald Trump, can vanquish inflation, or if the scales will tip, reigniting the eternal battle between the forces of order and chaos lurking in the bond market,” he said.

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Stephen Miller

Global markets are showing signs of positive sentiment heading into 2025 but geopolitical uncertainty and the impact of the incoming Trump administration are the wild cards, according to GSFM and its fund manager partners Payden & Rygel, Munro Partners and Man Group.

GSFM investment strategist, Stephen Miller, says that much of the Trump Administration’s agenda – including the proposed tax cuts and deregulation – will provide a tailwind for equity markets. However, the risk for investment  markets, reflecting that same agenda, is the prospect of higher bond yields. Those higher yields may attenuate the potential gains in equity markets.

“A key factor is the already gargantuan US budget deficit. Given the prospect of large corporate tax cuts it now seems certain that bond investors will be asked to swallow the enormous amount of bond issuance that is needed to fund a budget deficit of such an extraordinary magnitude. In so doing the bond market will likely develop episodic and potentially severe bouts of indigestion that have the potential to send yields higher.

“Certainly, Trump 2.0 has undertaken to embark on a high grade weaponisation of trade that will fuel inflation via aggressive tariffs. That will inevitably result in a spike in inflation and bond yields.”

Domestically however Mr Miller says it is unlikely that Trump’s tariffs will have a meaningful impact on Australian inflation and, by extension, the RBA policy rate.

“Trump’s policies are inflationary for the US. But they will have a barely perceptible impact on inflation in Australia. That is the case even if China and others retaliate.

“My view is that better than anticipated progress on inflation will see a rate cut from the RBA will in February.”

“As with 2024 there are mega forces at play, particularly in the AI / technology area, that might power the performance of selected sectors. That might well be a boon for active managers. Equity markets had a stellar 2024 despite the US 10-year bond yield ending the year higher than the level at which it started the year,” Miller says.

Eric Souders, director and portfolio manager at Payden & Rygel, says the starting point for the Trump administration today is markedly different than it was in 2016.

“Since 2016, the fiscal deficit has increased substantially in the US. Inflation is well above 2016 levels and remains above the US Federal Reserve’s (the Fed’s) target. The US does not need growth today, in fact growth likely needs to abate,” he says.

He believes the policies under the Trump 2.0 administration will likely be more balanced.

“This time around the US economic cycle is wage driven as opposed to credit driven. Nominal wages are stable and healthy, with growth at 4-6 per cent for nearly eight straight quarters. Real wages have risen in recent quarters, increasing purchasing power. The labour force structure is also different, as we have the highest prime working age employment in 25 years. This drives spending.

“Financial conditions are not tight and asset prices – including equities, US housing and credit spreads – are at all-time highs.”

Looking ahead, Mr Souders says there are clear areas of opportunity and areas to avoid in fixed income in 2025.

“Corporate credit, namely high yield bonds and bank loans, should perform well given pro-corporate policies from the Trump administration.

“Commercial mortgage-backed securities (CMBS) are vulnerable given sensitivity to long-end interest rates and bond valuations that look less appealing given credit spread tightening in 2024.

“Emerging markets will be a mixed bag given expectation for higher interest rates and currency volatility,” he says.

Commenting on global markets, Munro Partner’s portfolio manager Qiao Ma says: “The bull market which began in 2023 is entering its third year, but there is still a significant valuation gap between smaller companies and their mega-cap counterparts, presenting compelling investment opportunities.”

To buffer against volatility she is focused on diversifying into structural tailwinds and thematics including decarbonisation and security.

“We are in the first innings of attempting to decarbonise the future of our planet. Our focus is on installed nuclear power, gas turbine manufacturers, and companies involved in the build-out and maintenance of the electrical grid.

“Hyperscalers like Microsoft and Amazon making these large investments also have the strictest net zero carbon pledges.

“Our expectation is for global demand for data centres to more than double over the next five years, driven by hyperscaler and tier 2 cloud customers building out the necessary infrastructure for AI training and inference.”

On the defence thematic, Ms Ma says threat environments are continuing to grow globally from both active military conflicts and from attacks on the cyberspace.

“Threat deterrence via technological superiority is a high priority for all nation states, as we are seeing more companies focused on this space with earning growth potential.

“European defence budgets are increasing, with many nations now lifting their spending levels. Elsewhere, US homeland security spending is likely to increase as the new government seeks to secure the border and keep the cities safe, fulfilling stated election promises,” she says.

Man GLG Asia Opportunities Fund portfolio manager, Andrew Swan, says while developed market valuations continue to climb, Asian equities have been largely overlooked by investors.

“We see a turning point with several tailwinds suggesting a potential resurgence in earnings and share price growth across the region.

“Anticipated interest rate cuts by Asian central banks are expected to invigorate equity markets. Additionally, fiscal reform and a focus on stimulating domestic consumption in China point to a positive shift in the world’s second-largest economy. Furthermore, the forthcoming infrastructure and devices cycle, fuelled by AI advancements, is likely to disproportionately benefit Asia’s hardware manufacturers.

“While Asian equities have been undervalued for an extended period, the combination of these factors can create compelling opportunity for investors. We believe the region’s inherent resilience, coupled with anticipated policy changes and technological advancements, paints a promising picture for the future,” says Mr Swan.

“Tight financial conditions have weighed on Asian markets, but there’s a strong case for optimism. As we anticipate a shift towards looser monetary policies these markets are poised for a significant rebound.

“This presents an attractive investment opportunity. Smaller economies like Indonesia and the Philippines, which have demonstrated solid corporate earnings growth, may be well-positioned to benefit,” he says.

The recent appreciation of local currencies, especially in Indonesia, also signal the start of this positive trend, Mr Swan adds.

“Investors seeking growth opportunities in a dynamic and evolving market would be wise to consider an allocation to this region. As Man Group’s analysis indicates, the tide is turning for Asian equities, presenting a compelling investment narrative for the foreseeable future.”

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Payden & Rygel, portfolio manager, Eric Souders says that bonds provide good prospects for potential returns on a risk adjusted basis, particularly versus more risky asset classes like equities, but he added it could be time for a rethink on their place in a traditional 60/40 portfolio.

“We believe the traditional 60/40 portfolio could be recalibrated to include more multi-asset strategies.

“With an expected downturn in the global economy, it is important for investors to look to active management. They need to have more latitude around stock selection, and more latitude around interest rate duration, and not necessarily be tethered to a specific benchmark.

“The bottom line is that bonds should play a more prominent role in portfolios today. But on the 40 side of that 60/40 equation, investors can perhaps be more creative around the types of bonds they are buying,” says Mr Souders.

He adds that the current macro economic environment opens up favourable opportunities to invest in higher quality bonds which are providing good yields.

“Yields are higher across the board in fixed income, which has not been the case for the past three to five years.

“When constructing a portfolio and deciding where to put capital, higher interest rates means including cash is more a comfortable decision for investors. The same is true for those looking to invest in government bonds and high-quality investment grade corporate bonds.

“Bonds offer good running yield potential, of a much higher quality, plus potential price upside.”

Mr Souders says credit spreads are still tight, but investors are now well compensated to hold higher quality securities.

“Today you are getting paid to own higher quality securities. You don’t have to reach for yield. In fact the ‘reach for yield’ is almost the reverse of what it was years ago.

“Similarly, you don’t have to reach down the credit quality spectrum, or head further out on the yield curve, for returns. This means investors can be more conservative and defensive at the front end.”

He concedes the front end is controlled by central banks and government policy, so there is the potential for volatility.

“This potential volatility can be mitigated by applying a strategy that focuses on absolute returns, is concentrated on the zero to five year maturity spectrum, and moves capital toward higher quality assets,” says Mr Souders.

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Nick Griffin

The COVID-19 pandemic recovery remains non-linear across developed and emerging economies leading to a patchy outlook for bond and equity markets, but pockets of opportunity remain, according to GSFM and its fund manager partners Payden & Rygel, Munro Investment Partners and Redpoint Investment Management.

Payden & Rygel director, Eric Souders, says the next phase in the COVID-19 economic recovery will be in developing parts of the world.

“We expect this phase to begin during the latter part of this year, with encouraging data points already occurring and a continued belief that we will continue to see vaccine diplomacy expand to smaller, poorer countries.

“From a bond market perspective some attractive opportunity remains in securitised credit. In addition, an opportunity also lies within emerging market debt – which we are preparing for now – as we believe the market will begin to price in this opportunity before year-end.

“Notably, we have identified high-quality parts of the below investment grade sovereign universe as an opportunity. Valuations here, relative to corporate credit, are at 10 year highs and fundamental tailwinds are already in place, such as rising commodity prices, a benign US dollar, and a strong recovery in China.

“With all that said, fundamental research is paramount and security selection critical given broad market valuations are not cheap and volatility remains very subdued. In this environment absolute and unconstrained bond strategies – which eschew benchmarks and focus on returns over time – will become more prominent in the marketplace,” Mr Souders says.

Munro Investment Partners chief investment officer, Nick Griffin, says the emerging global economic recovery is allowing for him to invest in a broader set of investment ideas.

He is seeing opportunity in a number of focused areas of interest, including digital enterprise, the emerging consumer, semiconductors, climate and innovative health, and says the pace of the global economic recovery will provide greater scope for the team to scout out investment opportunities.

“Last year markets were very bifurcated, but now that we are poised for economic recovery as vaccine rollouts are implemented around the world, there are a number of compelling opportunities that we can start looking at again.

“For instance, emerging consumer stocks – such as aerospace and luxury goods – are areas that have been in the fund in the past, and the recovery has provided the opportunity for us to invest in them again. Airbus and Italian luxury good manufacturer Moncler have returned to the fund in 2021.

“Other areas – like semiconductors – are ones that we have liked for a long time. They did well during lockdown and they will also do well in an economic recovery. Semiconductor investments have been very good for our portfolio over the long term, both through the recent recovery and also through lockdown. Nvidia and Dutch lithography equipment manufacturer ASML are key investments here.

“Another important focus is climate change. Climate is hugely leveraged to stimulus spending, and it will also do well during an economic recovery. As companies refurbish or rebuild or spend for the future they will obviously do this in a greener way, and there are a number opportunities in this area. HVAC equipment manufacturer Trane Technologies and wind turbine OEM Vestas are good example here.”

Mr Griffin says the team doesn’t focus on trying to target particular countries or economies when it invests, but rather looks for companies within its areas of focus with good prospects.

“Earnings growth will drive stock prices and provided you don’t pay too much for them it will all work out in the long term,” he says.

Locally, GSFM investment strategist Stephen Miller says investors can expect the maintenance of the historically high accommodatory tack from the Reserve Bank of Australia (RBA) to continue for the foreseeable future.

“The RBA is happy in the current circumstance to lag the normalisation of policy rates, particularly compared to other commodity-intensive developed economies such as Canada, Norway and New Zealand where rate increases are foreshadowed within a year. The point of difference between the RBA and the others is underscored by the RBA’s expectation that that the condition for any increase in the policy rate “will not be met before 2024.”

“As part of the quest to generate tight labour markets and attendant wage and price inflation, the RBA remains motivated to avoid an unwelcome upward movement in the Australian dollar (AUD). Any move up in the AUD could well frustrate the task of getting unemployment down and wage growth and inflation up.

“As the RBA has achieved its stated objective in pursuing yield curve control and quantitative easing of keeping the AUD low, it is unlikely to risk the unwinding of those achievements by prematurely foreshadowing a more significant retreat from the currently historically high levels of monetary accommodation.

“That will likely remain the case until there is some clarity around the US Federal Reserve’s roadmap to tapering.

“In emphasising outcomes, the RBA may feel that while inflationary pressures in the US are clear – and there is debate about its persistence – those pressures are less visible in Australia.

“The RBA also appears largely unconcerned by market expectations of inflation rebounding perhaps reflecting the fact that current market-based expectations of inflation are toward the bottom end of the RBA’s 2-3 per cent target range,” Mr Miller said.

Redpoint Investment Management CEO and lead portfolio manager for Australian equities, Max Cappetta, says local economic conditions have made it challenging for those investing for income.

“However it is clear that dividends are returning for equity investors, after the largest contraction in payments in living history.

“The growth in dividends from resources is of particular note, as a result of all-time highs in the price of iron ore. This is being driven by strong global demand as well as production issues in Brazil tightening supply. Our key picks here are Fortescue, Rio Tinto and Mineral Resources.

“Bank dividends too, are on the way back. Government and RBA support has meant that earnings and debt provisions have not been as bad as expected, but new lockdowns are cause for concern. We do not expect them to return to pre-COVID levels until calendar 2023.

“There are also a range of dividend winners over the past year that are growing dividends or looking at returning capital to investors via buybacks. Key examples are in retail – such as JB Hi-Fi which grew dividends in 2020, Metcash which recently announced an off-market buyback and Woolworths which has indicated that capital management may also be on its radar,” he says.

With dividends returning, Mr Cappetta adds it is important for investors to look beyond simply choosing high yield stocks.

“There is a cyclicality to dividends over the calendar year, and it is important to align stock selection with dividend capture,” he says.

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