Flexibility: The Key for Fixed Income Investing in 2016 | Mackenzie Investments

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2016 Investment Outlook

Investors must be flexible if they wish to take advantage of fixed income opportunities in 2016. Steve Locke, Mackenzie Fixed Income Team Lead, shares his outlook for global growth, energy, the Fed and more. 

Flexibility: The Key for Fixed Income Investing in 2016

Steve Locke, Mackenzie Fixed Income Team Lead, details the fixed income opportunities that investors may take advantage of in 2016.

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The theme of flexibility will be key for investors who wish to take advantage of fixed income opportunities in 2016. Low government bond yields and overall accommodative monetary policy rates mean that opportunities obtaining yield must come from other credit sectors.  With the recent expansion of corporate credit risk premiums, there are some better yield opportunities in the corporate and high yield bond space, and in loans.  But, at this point in the credit cycle, careful selection is needed to take advantage of these sectors, and some total return volatility from these investments should be expected. For example, even some good quality high yield corporate issuers may have a swing factor of five to ten percent positive or negative - on their total return, driven by market volatility.  To help mitigate this, one solution is to pair higher yield opportunities with investments that typically have less volatility, such as investment grade bonds.

For 2016 global growth is likely to stay roughly in the recent range, biased lower by slower growth in commodity-based economies, and relatively steady growth in Europe and the U.S. Further lift will hinge on continued positives in Europe, as well as U.S. consumers feeling the benefits of lower energy prices and spending small wage gains.

The outlook for energy will remain relatively weak this year, although a bottoming process may play out this year. If energy prices stabilize, a base effect should come into play in the first half of 2016 to raise the headline level of inflation back toward a 2% target for most developed nations.

Commodity-producing nations, like Canada, will have a tough time in 2016. As a result, these countries will continue to encourage accommodative monetary policies and have somewhat weaker currency profiles; however, it is likely these currencies will not weaken at the same pace as we saw last year. It is our view that the Bank of Canada will cut another 25 basis points from its rate.

To learn more about opportunities in the fixed income space, as well as a potential rate cut by the Bank of Canada, please read our full outlook in the January issue of Mackenzie Express. 

Key Points

  • Further lift in global growth will depend on continued positives in Europe and U.S. consumers feeling the benefits of lower energy prices and spending small wage gains.
  • The outlook for energy will remain relatively weak, but a bottoming process may play out this year.
  • Commodity-producing nations, like Canada will have a tough time in 2016, meaning these countries will employ further accommodative monetary policies and have weaker currency profiles.

For more of our 2016 outlook, please read the January issue of Mackenzie Express.