David Leduc, director of global fixed-income with Standish, says the recovery is almost guaranteed because the US Federal Reserve “will do more than enough” to stabilise the economy, and that its efforts have been supported to varying extents by other central banks. But this liquidity supply means that inflation will become a concern in two to three years’ time. In some developed economies, fiscal deficits were haunting their bond markets. This was particularly relevant for Spain and Ireland, which, like the US, are on the downside of huge real estate booms and had few ways of correcting their fiscal imbalances. But Leduc says such ongoing woes can generate short-term opportunities. “We’ve just started buying some Greek government debt.
We’ve made some money out of it, and will continue, in the short-term, to buy it. “But it’s not clear if Greece will work things out. In 12 to 24 months we’ll see if Greece has done a lot of what it said it was going to do – fiscally and socially – since so many people are dodging taxes. “This will make things more volatile, which makes things based on these spreads more volatile.” The stronger fiscal positions of some emerging market economies also attracted the manager’s attention. Brazil is a favourite, but Mexico, Malaysia and Indonesia have also been recently bought. “This is not just a short-term tactical investment decision. It’s established that many of these countries have gone beyond the old boom-to-bust cycle,” Leduc says, adding that these economies should display improvements in credit quality in the coming years. “As they continue to manage inflation risks, their credit quality and ratings will continue to improve.” At Omega, McCrum observes there has recently been a surge in debt issuance from Asian markets. While not all of it is good, the manager has increased its allocation to the region from 4 per cent to 18 per cent because of improving balance sheet strength among issuers.