For global fixed-income research teams and their clients, the future is now.
While 2020 brought unprecedented market fallout and historic monetary and fiscal policymaking, credit investors are looking ahead to post-pandemic realities amidst busy and complicated markets, according to the top providers of analysis to the buy side.
“If 2020 was about understanding the investment and operational fallout from the pandemic, 2021 has been about grappling with what the post-pandemic world will look like, what has changed forever more, and where we might see some reversion to pre-pandemic norms,” said Stephen Dulake, JPMorgan Chase & Co.’s global head of credit, securitized products, and public finance research.
Despite weakness in global emerging markets and China’s high-yield real estate market, it has been “a good year” for credit overall, according to Bank of America’s head of global fixed income, currency, and commodities research Michael Maras.
“If you think from where we started, we obviously had fantastic returns at the end of 2020, [and] investors were increasingly concerned about fixed income returns,” he said. “Investors look at emerging markets and high yield in particular as indicators for potential market turning points. But although emerging markets didn’t have a good year in 2021, high yield in developed markets has remained resilient and surprised a lot of people by delivering positive returns.”
The main reasons for this resiliency, according to Maras, are historically low default rates and low real interest rates. As fixed-income investors focused on beating inflation and real rates became increasingly negative, the investors decided to stay in credit. “That was the big surprise,” said. “Negative real rates helped keep funds in credit markets.”
2021 also ushered in policy uncertainty around U.S. rates and the Federal Reserve’s response to rapidly rising inflation. “There is no doubt that a potential change in the Fed’s reaction function remains the biggest risk,” Maras said. “Though investors agreed during 2021 that U.S. rates were set to move higher, uncertainty regarding the Fed’s timing and number of rate hikes will remain a key risk in [the first half] of 2022.”
According to BofA Securities’ November 2021 global fund manager survey, a majority of investors agree that inflation is a risk but only 35 percent believe it will be permanent, while 61 percent think it is transitory, up from 58 percent in the October survey.
In addition to concerns around a looming new Covid-19 variant, the other main market risks are related to China, including geopolitical tensions surrounding Taiwan and concerns about China’s monetary and fiscal policy, Maras said. “If we don’t see a policy easing in China, that can have a negative impact on global growth and emerging markets in 2022,” he added.
Luis Oganes, JPMorgan’s head of currencies, commodities and emerging markets research, similarly emphasized the role of global policy in credit markets. “Differentiation in the mix of inflation and growth and the central bank policy responses to this scenario across developed and emerging market economies during 2022 will create a fertile macro backdrop for fixed-income markets in many years,” he said. “Relative value selection across assets will require careful differentiation between ‘good hikes’ and ‘bad hikes’ by central banks around the world. This will be a challenge but also an opportunity for our fixed-income research team to continue to differentiate itself from the rest.”
And differentiate itself it has: JPMorgan in 2021 extended its reign as the top provider in Institutional Investor’s third annual Global Fixed Income Research Team, based on the opinions of 6,000 investment professionals representing 1,600 institutions.
Respondents rated firms for fixed income coverage globally and in the U.S.; Europe; Latin America; Japan; Asia ex-Japan; and emerging Europe, Middle East, and Africa. JPMorgan was awarded a total of 105 team positions across the survey, narrowly edging out second place finisher BofA Securities, which captured 102.
Oganes said the “formula for success” for JPMorgan’s fixed-income research is its ability to deliver bottom-up analysis from its dedicated teams covering credit, rates, currencies, commodities, and emerging markets alongside top-down views from its cross-asset strategy effort that looks at markets holistically.
“To navigate complex market environments, clients need high quality, in-depth analysis and access to top-rated analysts to inform debate,” he said. “These are some of the core strengths of JPMorgan’s fixed-income research offering, as evidenced by the surge of analyst interactions with investors since the pandemic started.”
There was a clear bifurcation in the survey results. Third place finisher Morgan Stanley earned 59 total team positions, while No. 4 Barclays had 52. Citi rounded out the top five with 44 positions.
Meanwhile, BofA Securities won the most first team positions of any provider with 62. The next closest firm, JPMorgan, secured 24. Maras credited the firm’s long-term strategy for its successes. “Increasingly if you really want to be a top fixed-income research team, you must be a truly global and cross-asset platform,” he said.
This means providing coverage in as many places and regions as possible as clients are increasingly focused on building global multi-asset investment platforms and need that expertise. “The past two years have reconfirmed that alpha is being generated by so many different factors and parts of the world,” he added. “You have to have the best analysts in those places.”
BofA, for instance, has upped its coverage in the China high-yield market over the past year to meet new client demands, Maras reported. No longer a niche market, the country’s property sector accounts for well over 20 percent of China GDP. Maras said research teams need to be anticipatory of their clients’ needs. “Today it could be China high-yield and tomorrow it could be changes in ECB monetary policy or politics in Latin America,” he said.
BofA has also launched a new digital asset and cryptocurrency strategy team as well as ESG fixed-income research as credit investors catch up to their equity counterparts. “Equity investors were well ahead in ESG,” Maras said. “Now ESG considerations are at the top of fixed-income investors’ agendas.”
At JPMorgan, Dulake said that client concerns remain the same as they were this time last year and the sell side will be there to help clients navigate the obstacles and opportunities looking forward.
“How to generate returns when credit spreads are tight and when any notion they’ll really widen seems to be based more on hope than reason remains the proverbial problem for investors, at least creditors, as we head into 2022,” he said. “Everyone is challenged to think of new ways to maintain or add alpha, whether it’s through things like factor-based or thematic, investable index-based strategies, as well as up their general ESG game. We have spent and continue to spend more time on all of these things.”
