Insurance Insights Q3 2024: Macro conditions ripe for fixed income

As we enter the final quarter of the year, investors continue to assess what kind of economic landing, led by the US, the global economy is likely to face. Market jitters have recently picked up on renewed concerns about growth risks for the US economy – spurred by disappointing manufacturing and jobs data. In Asia, a bifurcated Chinese economy and monetary normalization in Japan has triggered significant volatility.

Still, we remain confident that our base case scenario will play out: US growth is slowing but we nonetheless expect a relatively soft landing. China’s economy has recently softened though we can expect more policy support. Growth around the APAC region is subdued but should start to improve in the coming months.

A major catalyst for economic reacceleration is more expedient central bank easing. The Fed seems ready to cut, and it has been more than 14 months since the last rate hike. The Fed kickstarting its easing cycle will offer global central banks more breathing room to do the same, conditional upon their domestic economies. 

Macro conditions are thus ripe for fixed income, particularly in the US, to outperform. I think investors would want to be defensively positioned against a slowing macro environment with possible bumps along the way (while benefitting as central banks around the world starting their rate cutting cycle). A strong argument could be made for allocations across the yield curve. Short-term yields are likely to fall due to imminent interest rate cuts while longer duration yields could also fall due to rising recession risks.

We are positive on allocations to US investment grade and high yield bonds to capture the current attractive yield environment and position more defensively as we move through a murky macro and political backdrop in the US.

Even though we favor somewhat more defensive positioning such as overweighting bonds over equites, there is also value to be had in the global equity market. European and Japanese equities are attractive at these valuation levels, as fundamentals continue to firm and corporate earnings improve.  

Certainly, there are tail risks that we are keeping a keen eye out for. With the US presidential election just around the corner, we remain vigilant of the potential for unforeseen disruptive policies that could impair risk appetite. Further, fraught geopolitical relations can precipitate more complex geographical asset allocation decision making.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.