Michael Ashton, Managing Principal at Enduring Investments.

Fixed income strategies

Global volatility will see changes to US market conditions, but not as much as hyped, says Michael Ashton, “The Inflation Guy” and Managing Principal at Enduring Investments.

How investors can prioritise these challenges to their portfolios – whether it be inflation, recent moves from the US Federal Reserve, or turbulent geopolitical situations – are key considerations those in operations and investment management should watch carefully.

“The biggest challenge is that we are permanently shifting the investment landscape in a way that requires investors to change their business models.”

In a recent Clear Path Analysis report, “Institutional Fixed Income, North America 2023”, several senior industry players – including Ashton – spoke on the trends in politics and demographics that fixed income stakeholders need to be aware of.

Ashton said that it was important to look at the market conditions rationally and take all factors into consideration. “The biggest challenge is that we are permanently shifting the investment landscape in a way that requires investors to change their business models,” he continued. “In the last quarter of a century, stocks and bonds were inversely correlated, and inflation was low and stable, which meant that, to some extent, you could ride out rough times by leaning on your bond allocation.”

If inflation is semi-permanently in the 4-5% range, Ashton said, then this could mean that being able to rely on bond allocation won’t be the case going forward. “This means that your classic 60/40 risk allocation is much riskier than it used to be, which requires you then to be more active in managing it as opposed to sitting back, tweaking around the edges, and buying credit,” he said, adding that investors have to take a more active view now, especially given the current environment. “I do believe we’re seeing a semi-permanent shift.”

Geopolitical and demographic events

Ashton said he believed that the geopolitical circumstances that investors – primarily those from the US – found themselves in were important to look at but other issues were often underplayed in comparison, despite their importance.

“You have to throw demographics in [to the equation,” said Ashton. This year, India will overtake China as the most populous country globally. This is not just because of India’s faster growth but because China's population is shrinking, and the effect a smaller workforce could have on the world’s second-largest economy could be a worrying prospect.

“The global demographic challenge of societies is that they are ageing in some populations with the working population shrinking over the next quarter century, which is an inflationary influence,” said Ashton.

This is a supply shift in the wrong direction, he explained. “Granted it’s a quarter century in the making with globalisation, but the arrows are pointed in the wrong direction in both of those cases.”

“We can take globalisation further and say that beyond deglobalisation and nearshoring it’s all somewhat inflationary.”

A 2013 paper from the Center for Retirement Research at Boston College argued that “older workers have often been considered less productive than younger ones, raising the issue of whether an aging workforce will also be a less productive one.” This could have more effects on the economy, slow growth, and cause other issues that would require the attention of those working in fixed income strategies.

“We can take globalisation further and say that beyond deglobalisation and nearshoring it’s all somewhat inflationary,” said Ashton. He noted that it could be carried through to the extent that when geopolitical friction between major superpowers is added to the mix, it changes the allocation of the resources that had been shared up until then – such as refined neon and semiconductor chips, not only oil and gas. “This factor is a known unknown, but potentially a very large known unknown,” he said.

All these factors mean that a fixed income strategy will require operational resilience going forward – and competent research into where market trends are heading.

To see more of this interview, and to read the report in full, please click here.

 

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