13 Apr 2021
09/04/2021 | Tim Foster, Global
With the global economic recovery largely on track, our thoughts are inevitably turning to what the next phase of the cycle will have in store for markets. Against this backdrop, Fidelity Strategic Bond Fund Co-Manager Tim Foster shares his latest views on the evolving opportunity set across fixed income assets, with an eye to sustainability considerations.
The economic recovery has continued strongly of late, with some particularly robust manufacturing surveys pointing to further strength ahead, although an uptick in Covid-19 cases in the EU and continued difficulties with vaccine supply have weighed on sentiment at times. As we enter the second quarter, our thoughts are inevitably turning to the next stage of the recovery cycle.
Given the recent increase in government bond yields, combined with a fiscal stimulus (including the next round of infrastructure spending in the US) that already feels largely priced-in, as well as headline year-on-year US inflation numbers that are likely to peak in April we could be in a different environment quite soon - one of renewed worries about where the next leg of growth will come from. At the same time, the long-term trend of higher debt levels suppressing yields will continue to apply in our view.
So, what does this mean for fund positioning? After adding a little duration at the start of March, we are content to stay put for the moment at a little under six years. Meanwhile in credit, we’ve been active at the single name level, with additions in attractively valued US technology and communications names, and a reduction in some lower-rated high yield issuers given our broadly cautious stance on credit risk.
Beyond our overarching views on rates and credit markets, sustainability considerations continue to be front of mind. Utilities companies have long been a key focus for our fixed income funds, given their long-term funding needs and stable cashflows. Many electric utilities are also at the forefront of the energy transition, increasing investment in green electricity generation and reducing their use of fossil fuels.
We were recently able to invest in an attractive transition story in the green energy space, the Public Power Corporation of Greece, which is the country’s leading integrated utility. The company’s new management team have set an ambitious target to close all of its coal-fired power stations in the next two years and aggressively shift into renewable energy, as part of the Greek government’s plan to reduce the country’s greenhouse gas emissions by 63% by 2030.
Global sustainable bond issuance
Like a number of other new corporate bond issues, Public Power Corporation of Greece’s issue was sustainability-linked. It carries a coupon that will increase by 0.5% if the company has not reduced its emissions by 40% by the end of next year. Compared to 2019, it has already closed 20% of its coal-fired capacity so is well on the way to achieving that target.
For active bond managers, there are plenty of opportunities to participate in positive sustainability stories, but it is crucial to do your due diligence on just how “green” the issuer’s credentials and intentions really are.
Important information
This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than in other more developed markets. The Fidelity Strategic Bond Fund can use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The value of bonds is influenced by movements in interest rates and bond yields. If interest rates and so bond yields rise, bond prices tend to fall, and vice versa. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuers ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between government issuers as well as between different corporate issuers. Due to the greater possibility of default, an investment in a corporate bond is generally less secure than an investment in government bonds. Sub-investment grade bonds are considered riskier bonds. They have an increased risk of default which could affect both income and the capital value of the fund investing in them. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities and is only included for illustration purposes.