The first quarter of 2020 (1Q20) was brutal to investors across both equities and fixed income. The disruption in operations and the global supply chain increased the probability of bond defaults, which led to an increase in yields across various bond segments.
As the calendar flips across 2Q20, investors have started to look beyond the near-term impact of Covid-19 and redirected their focus back to stimulus support coming from fiscal and monetary fronts.
Improving virus containment progress across various parts of the world also helped improve investment sentiment and subsequently gave a leg up to global bond prices, particularly risker bond segments.
As of June 30, 2020, there are 50 fixed income funds on our platform with complete return records over 1H20. A total of 45 (90 per cent) funds clocked positive returns while five (10 per cent) funds posted losses. On average, these funds have posted a 2.6 per cent return over 1H20.
Yield starvation buoyed fixed income prices
While Covid-19 concerns caused a sharp dip in bond prices in March 2020, the recovery came in swiftly after that. Monetary policymakers across the globe have reduced interest rates to a historical low to make funding affordable for businesses and consumers. Other than lowering interest rates, central banks in other parts of the world have also resorted to quantitative easing or similar asset purchase programmes to address concerns on market liquidity.
These policies have released an ample amount of funding into the financial system, primarily driving yields lower and buoyed bond prices. As a result, many fixed income funds have reversed most of their losses over 1Q20 and finished 1H20 in black.
Within the list of top-performing fixed income funds, there are also funds with foreign currency exposure. Funds that invest in foreign currency denominated assets harnessed additional currency translation gains in a weak ringgit environment.
Risky bond segments ended up as bottom performers
Investment sentiment has recovered throughout 2Q20, evidenced by the strong 2Q20 performance numbers in some of the bottom performing fixed income funds in Asia and emerging markets.
While these funds have managed to recoup some of the losses, the overall performance is still lower compared to the other peers. The underperformance of the risker bond segments thus far could be due to investors preference for high-quality assets, as there is still a considerable amount of uncertainty surrounding the global economy and Covid-19.
Investors that took the window of opportunity to invest in battered fixed income assets last quarter had been rewarded decently, as market participants cheered on easy monetary policies and fiscal supports to help businesses and corporate tide through challenging times.
At this juncture, while green shoots are gradually spawning across the global economic landscape, the uncertainty surrounding a second wave and a modest recovery momentum are likely to keep policymakers’ foot on the gas pedal. With that, we expect bonds prices to remain supported in times ahead.
Within bond segments under our coverage, we maintain our favourable view on the high yield segment, but the potential upside is now lower after the yield compression that occurred over 2Q20.
Markets participants are still pricing-in uncertainties surrounding Covid-19, as yield spreads have yet to revert to pre-Covid-19 levels.
In this trying environment, it is crucial to distinguish companies that have solid fundamentals from troubled companies. As such, actively-managed fixed income funds offer investors a decent avenue to leverage on the capabilities of investment professionals to identify good companies that could weather across the current climate.
More importantly, investors can diversify their capital by investing in numerous quality companies handpicked by the fund management team.
For those who prefer a hands-off approach in managing their investment portfolios, they could consider investing via FSMOne Managed Portfolios.