Findlay Franklin, BlueBay Portfolio Manager, Credit Strategy & Asset Allocation, RBC Global Asset Management (UK) Limited, summarizes the market in 2025 for the asset class, and gives his thoughts for 2026.
2025 presented significant challenges for portfolio managers despite strong year-end returns for risk assets and fixed income. Multi-Asset Credit strategies helped investors navigate downside risks while capturing upside opportunities.
Emerging markets exceeded expectations, with local markets benefiting from U.S. dollar weakness and aggressive rate cuts, while hard currency returns relied on high-conviction, bottom-up stock selection in countries.
Convertible bonds excelled by providing convexity in the AI sector and downside protection, supported by record issuance.
The 2026 macro environment appears favourable for fixed income, with resilient U.S. growth, expected Fed rate cuts, and European green shoots aided by fiscal stimulus, meaning Multi-Asset Credit remains a dynamic approach to capitalize on global opportunities.
Flexibility is critical as U.S. exceptionalism and dollar dominance face challenges, with investors increasingly scrutinizing currency hedges and diversifying globally amid improving sovereign balance sheets in emerging markets.
Watch time: {{ formattedDuration }}
View transcript
2025 has been a strong year for risk assets, and fixed income has been no different. That said, if you were to sit here today and look across the year-to-date returns for a spectrum of different asset classes, you'd be forgiven for thinking that it had been a relatively easy year for PM’s. The reality of sitting in the seat has been entirely different, and this year has been anything but easy. We have navigated a gauntlet of volatility the year-end numbers just don't capture. Think back to the shock release of DeepSeek in January, that cheaper yet entirely competent Chinese model that completely reset the capex narrative for US tech. Then we had the Liberation Day tariff announcement in April, which whipsawed the entire macro landscape, followed by fresh escalation in the Middle East in the early summer.
We spent 11 months dodging rotations, mixing both micro and macro narratives. In that context, being able to cast the net widely across a number of credit asset classes has allowed investors to weather the storm well across Multi-Asset Credit, protecting to the downside, but then capturing those updrafts and capturing that carry to deliver a year of strong absolute returns despite those headlines.
Two areas really stand out for us this year. First, emerging markets. It's been a tale of two cities here. On the local side, we saw a breakdown in the dollar dominance earlier in the year, combined with powerful deflationary forces across EM economies that gave central banks the green light to cut rates more aggressively, driving local returns to their best year in recent memory. On the hard currency side, it wasn't necessarily a beta trade. It was a stock picker's market. The returns at least that we saw came from high conviction, bottom-up name selection in specific idiosyncratic stories. Think Argentina, Lebanon, or Colombia.
The second standout has been convertible bonds. Converts have done exactly what they're designed to do. They provide investors convexity, capturing the upside in the AI sector across both the US and in Asia, but offered a floor when equity valuations got shakier. We also saw a record year of issuance, which kept the market liquid and full of opportunities. If you're looking for a risk-adjusted return, convertibles have delivered arguably the highest Sharpe ratio in fixed income this year.
Generally, we'd look to 2026 as an environment where you want to own fixed income. Broadly, the macro backdrop looks supportive. In the US, we're seeing resilient growth bleeding into next year. The Fed, we continue to expect to cut rates, aided by deregulation and tax cuts flowing through the economy. In Europe, we're also finally seeing some green shoots, hopefully, reignited by fiscal stimulus in both infrastructure and defense. Multi-Asset Credit again offers a dynamic way of capturing that, casting the net widely to global opportunities across an array of asset classes.
With that, we believe there's two key messages for the coming year. Firstly, we prioritize flexibility in the context of a global product. One of the key themes of this year has been the constant challenge to the idea of US exceptionalism, and the dominance the US dollar has played. More recently, we're beginning to see a renewal of that debate, challenging the idea of the exceptionalism of corporate America and that the valuations of some of the largest players in the AGI race are starting to be challenged. If that US premium starts to wobble, we'd argue that the marginal dollar isn't going to unquestionably flow into US assets anymore.
We're already starting to see this with foreign buyers in regards to their hedge ratios. Those hedges, how much they protect themselves against currency moves, are being managed a lot more tightly than we've seen in recent history. Investors aren't blindly accepting dollar exposure anymore. That should naturally put a cap on the dollar's dominance. When you combine this with improvements to sovereign balance sheets that we're seeing in emerging markets, notably in comparison with their developed market counterparts, you suddenly have a very compelling, diverse global map of opportunities.
Secondly, we believe active management will be key this year. With fixed income index spreads continuing to sit at multi-decade tights, our job in 2026 isn't just asset allocation. Although we still believe that getting the top-down calls will be important, more pressing will be the dispersion trade. We need to look under the surface of those indices. By prioritizing strong bottom-up name selection, we can build portfolios that are actually efficient, balancing yield against that default risk.
To wrap up, 2026 is about combining those big top-down macro calls with rigorous bottom-up name selection. If you can get that right, spreading the net widely with Multi-Asset Credit is going to offer ample opportunity next year.
Featured speaker:
Findlay Franklin, BlueBay Portfolio Manager, Credit Strategy & Asset Allocation, RBC Global Asset Management (UK) Limited