Mark Dowding:

Looking back at 2024, what to say in terms of reviewing the performance across fixed income markets? Well, I think the first thing that I'd really note and observe is it's actually been a very good year for credit investors over the course of the past few quarters. And I think a lot of this you can put down to the fact that actually, when looking at the US economy, we've continued to see really pretty robust growth through the course of the year.

I think coming into 2024, many people had been expecting a recession in the US to show up. Maybe on the back of the yield curve having been inverted, this historically perhaps a bit a bit of a recession indicator. But I think for ourselves, we'd always believed that actually this was a bit of a false flag. And actually, the economy looked to be in a pretty healthy state from our point of view.

So, we've tended to be more on the constructive side of the trade over the course of past months. Otherwise, from a macro perspective, it's a year that's actually seen longer dated bond yields rise, maybe again, as some of those recession fears have been pushed back some, and at the same time, we've actually seen shorter dated yields going in the other direction, with the Federal Reserve announcing its first interest rate cut of 50 basis points in September of this year. Following up again with a further cut in October.

So, from that point of view, you have seen some steepening of curves. But in terms of fixed income macro, it's a year where benchmarks have ended up underperforming cash with longer dated yields going up, not down. And so, from that point of view, I think a bit of a mixed year for fixed income investors, maybe pretty good in credit, not so good in macro, but certainly a year with plenty of investment opportunity for active investors such as ourselves.

So, looking ahead to 2025, what to expect? Well, I think the first thing to expect is volatility. Trump 2.0 is going to mean lots of change and lots of disruption. We almost think that this is the Trump narrative. Sometimes, if you go back to the Art of the deal, he delights in swaying his opponents off balance by saying and doing sometimes pretty outrageous things.

But in this period of change, clearly this can drive some volatility in financial markets. So, there will be times when you want to be positioning for this, either when markets are overreacting or under reacting to what's happening in the new administration. The second thing that I'd say going into the course of the year ahead is it should be a year where we see a lot more steepening of the yield curve.

I continue to believe very strongly the profligate fiscal policy is ultimately going to drive a pretty dramatic steepening of the US curve. At the moment, we think more of a bear steepening. And there'll be a narrative here where investors can really position for this, but I don't really like longer data duration as a result, I'd also infer that, a world of Trump, a world of trade tariffs.

It could be a year where we continue to see the dollar trading pretty well. I know the dollar feels a bit overvalued. It looks a little bit rich. But in many respects, I think that, in the last few years, it's been quite difficult to make a lot of money out of FX as an asset class. But we could be coming into a period where these really divergent macroeconomic trends, do drive a bit more of a currency opportunity if I speak to Europe.

I think here, the theme is all going to be around what does Germany do with its fiscal policy? Does it land on the black zero after the short signal after the German elections? We'll wait and see what happens there. But the one thing that I would say is that if we had a world where Germany does loosen the fiscal purse strings, where it allows the EU to deliver a lot more debt issuance, that's probably not great news for longer dated European fixed income.

On the other hand, if Germany continues to hold the purse strings very tight, that's going to probably mean that the ECB is going to need to lower interest rates more dramatically. And that's likely to benefit the shorter end of the yield curve. So again, in Europe, just like in the US, we think the theme going into the year is the year of curve steepening, it’s the way that we'll be playing it in the UK.

We think the UK by contrast, is the country where inflation remains maybe more elevated than it does in either the EU or the US. That being the case, I think it's going to be hard for the Bank of England to cut interest rates very much further. At the same time, I think the Rachel Reeves is in a bit of a delicate position, certainly doesn't have any fiscal space.

So, unlike other countries, it feels like the UK is the economy with no real room on either the monetary side or the fiscal side to actually do anything much to actually support economic growth. Otherwise, in Japan, we continue to be interested in the theme of reflation, actually the aging of society, the shrinking of the pool of available labor is really putting something of an upward bid.

Now, on wages. We're looking for wage gains to go above 5% again in Q1 as they did, in Q1 in 2024. That being the case that's feeding into inflation, that feeds back into the normalization of Japanese monetary policy. So, we continue to be convicted looking for higher JGB yields. At the moment, we continue to see ten-year jobs being supported by PJ bond purchases.

But they will diminish during the course of next year as they do. So, we think that that ten-year rate can go up to 1.5%, in terms of the months to come, and otherwise, this narrative of policy normalization in Japan at a time when rates are going in the other direction in the eurozone actually means that Euro/Yen looks quite an interesting currency cross through my eyes. Again, that looks very cheap on a historic valuation. And from a level close to 165 today, a level, back down at 140 this time next year could well be achievable. Lastly, to say a couple of things in terms of EM and credit markets in EM, I think it's all about picking the winners, avoiding the losers, a thematic of Trump, a thematic of a stronger dollar, not necessarily the kindest will towards emerging market assets.

But there will be divergent performance. There will be assets to own. There will be assets to avoid. And so, I think it's really all about the skill when it comes to active management and otherwise in credit. I know valuations are tight, but we think that credit can continue to perform in the absence of a recession showing up.

So, in terms of credit spread, we continue to be content that IG credit can probably continue to outperform underlying government bonds at a time when there's an abundance of government bond supply, a relative shortage of corporate bond supply. It creates quite a powerful technical otherwise in credit; the one area that we are concerned about would be anything that's got too much leverage.

We are operating in a world where rates are staying higher for longer. In a world of higher for longer, this is bad for leverage. So, this is where you need to be careful around asset classes, such as private assets, private equity, private debt. These are these are areas where the structures have got a lot of leverage attached.

And if you end up with too much leverage in a world where rates are too high, you end up eating all of your free cash flow to debt servicing costs. So that's something to be a little bit more cautious on. And if you really want the higher yielding returns, we continue to emphasize the opportunity set in European financials, European Cocos we continue to like.

And I think the other thing that we sort of highlight is an asset class opportunity where the opportunity set looks pretty appealing, would be in European distressed where actually it's a part of the market where we think that there should be an abundance of opportunities. So going into 2025, not sure it's going to be the best beta year ever for fixed income, more broadly speaking.

But being active, there is going to be plenty of, opportunities, we think, for those with skill to actually read what's going on in the port of investment environment. With that, good luck. And best wishes for the end of the year.