2024 was marked by high levels of interest rate volatility, policy uncertainty and unexpectedly resilient developed market economic activity. Yields bottomed out in mid-September as the U.S. Federal Reserve (the Fed) began its easing cycle with a 50bp cut.
With inflation continuing to ease, even as economic growth remained supported, credit assets had an exceptional year. European bonds, starting from more attractive valuations, outperformed their U.S. counterparts for much of the year before experiencing modest underperformance in October/November. The U.S. dollar was materially stronger in 2024 with the Euro and Yen meaningfully weaker.
Outlook and Challenges
On a forward-looking basis, Insight sees an unusually high level of economic and developed market policy uncertainty. The recent U.S. election delivered the Republican party unified control of the government which significantly expanded uncertainty with greater ‘possible’ outcomes. U.S. trade policy is a particular source of uncertainty. Aggressive U.S. tariffs on imports would almost certainly prompt reciprocal action.
In Europe, the outlook for economic activity continues to worsen and downside risks mount. While the consumer has remained resilient so far, weakness in European manufacturing and political uncertainty in France suggest the possibility of a broader down-turn in the region.
In Japan, Insight expects inflation to remain sticky as a shrinking labour force keeps upward pressure on wages and the private sector more fully incorporates structurally higher inflation into its decision-making process.
They also expect Chinese economic activity to remain weak and on a structural down-trend. While policy makers are likely to deliver further fiscal and monetary policy support, they expect this to be on an ad-hoc, reactive basis and designed to manage the pace of the deceleration in the economic activity rather than a positive pro-growth stimulus.
Investment Opportunities
Insight believes this environment still offers opportunities in global fixed income. While developed market yields seem fairly priced overall, they think longer-term bonds, like U.S. Treasuries, may not fully reflect the risks of increased government borrowing. This could present potential investment opportunities.
They see potential opportunities in global bond markets, favoring Australian bonds over Canadian ones and core European bonds over Swedish bonds. Japan stands out as an exception, where they believe short-term Japanese government bonds are significantly overpriced. Insight expects their yields to rise due to high issuance needs, persistent inflation, and tighter monetary policies from the Bank of Japan.
When it comes to investments like bonds with credit spreads, Insight sees a mixed picture. While current valuations are high and the outlook uncertain, a stable economic environment and supportive policies provide some balance. European assets seem more appealing than those from the U.S., especially as risks tied to U.S. trade policy appear already factored in. In the U.S., tight spreads leave limited room for further gains, and corporate credit markets look vulnerable to changes in fiscal or monetary policy. Insight is positive on U.S. agency mortgage-backed securities and find high-quality, government-related bonds increasingly attractive compared to corporate credit.
Fund Strategy
Insight aims to generate income and capital growth while focusing on capital preservation. To do so, they use an active management strategy focused on security selection and an asset allocation based on countries, duration, the yield curve, currencies and sectors. They seek to generate positive returns while staying diversified primarily in a mix of foreign fixed-income securities, which may include debt securities issued by governments, municipalities and companies in developed and emerging countries, agency securities and high-yield bonds.
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