Geopolitical developments and central bank tightening have made risk asset volatility a surety this year, according to Franklin Templeton’s specialised investment managers Western Asset.
However, Western Asset has said that despite geopolitical turbulence and elevated volatility, market opportunities do exist.
A Western Asset ‘Key Convictions 2Q22′ report emphasised that emerging markets have been a recent laggard but could be the best reopening sector.
The report said: “Ongoing global growth is our base case and if we also get the reduced inflation that we expect to see over the course of 2022, then this would be extremely supporting of the case for emerging markets making a recovery.”
Western Asset also favours high-yield credit investments. The investment manager has a strong conviction in high-yield credits fundamentals albeit the tighter spreads and more compressed valuations.
High-yield issues will be upgraded to investment-grade status in Western Asset’s view, as such, it has been identified as a rising star.
The investment manager also shone a spotlight on mortgage credit for its attractiveness on a relative-value basis. Following Australia’s emergence from COVID lockdowns, lending has been conservative and real estate markets remain well supported by long-term fundamentals, the company said.
Of a similar predisposition, Gryphon Capital Investments chief executive Steve Fleming said: “Our deep lens into the domestic mortgage landscape reveals certainty around borrower affordability and we see no reason why residential mortgage-backed securities (RMBS) can’t continue to prosper in delivering the highest returns for the risks involved.”
Fleming added that fixed-income investors should invest in credit that is linked to cash rates, such as RMBS that have a floating rate of interest that increases if rates go up.
“Despite the global challenges, we believe that RMBS are better protected now from falls in house prices than prior to the pandemic,” Fleming concluded.
Notwithstanding optimism in fixed income opportunities, Western Asset chief investment officer Ken Leech did discern the importance of diversification in today’s market environment.
Leech understands that risk asset volatility is likely to sharply increase, which would make for challenging investment circumstances.
“This is why we focus on diversification. We believe the key to success in fixed-income investing over a long period of time is to have multiple diversified strategies that can address dynamic market conditions across as broad an avenue as possible,” Leech said.