Monthly Investment Viewpoint - July 2024
- 01 July 2024 (5 min read)
US bond market opportunities
Bond markets are known for offering investors potentially attractive risk-adjusted returns. But investors need to pay attention to credit spreads - the yield difference between two bonds with the same maturity but different credit ratings. Since 2023’s regional banking crisis US spreads have narrowed, allowing bonds to deliver very strong total returns. The average investment grade corporate bond spread is 100 basis points (bp) compared to government bonds, and in high yield it’s 326bp. Presently, we expect US investment grade returns will be closer to their current yield (5.0%-5.5%) while high yield could possibly deliver some 8% total return over the next 12 months.
Where do interest rates go from here?
Presently there is much uncertainty about interest rates – and about how much restriction the Federal Reserve is effectively transmitting to the economy. As such there is plenty of uncertainty about future monetary policy. Looking ahead, and with current US interest rate levels at 5.25% to 5.50% we feel that markets and investors need to be careful about pricing in too many interest rate cuts. This in turn has implications for expected returns across bond markets but is potentially supportive for short-duration bonds, which are less sensitive to interest rate movements.
Can China’s equity market match the US’s performance?
Historically, China – the world’s largest emerging market – tended to follow developed countries when it came to its equity market, especially the US. But since early 2023, it has diverged from this path. China’s post-pandemic reopening was challenged largely due to a lack of consumer spending and confidence. In contrast, strong consumer spending, supportive government policies and a technology sector surge have seen the US power ahead.
But China certainly has the potential to rebound from here - stock valuations are more attractive and supportive government policy measures are coming into place, largely supporting industrial and infrastructure upgrades. Longer term, China needs to rebalance to a more consumption-based economy.
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