In a higher-yielding but more uncertain world, where should investors look for growth now?
The new macroeconomic era will spell more volatility and cyclicality for investors, but it is also likely to generate higher nominal growth. While equities and alternatives are typically considered the most obvious route to capture this potential, higher yields are making fixed income more attractive than it has been in the past — not only for investors seeking income but also for those looking to grow wealth over the long term.
When thinking about growth through the lens of fixed income, the two most obvious contenders are emerging market debt and high-yield bonds — the fixed income asset classes that have the potential to provide the highest returns for investors.
Emerging market debt — government or corporate debt from emerging market countries — can be a volatile and complex market but may offer the potential for higher levels of income and capital appreciation than developed market debt. However, there is significant dispersion and idiosyncratic risk. For both local and hard currency emerging market debt, we would suggest that exposures should be built up cautiously over the long term, in line with the specific risk appetite and investment horizon of investors.
High-yield bonds may offer another opportunity to tap into growth. Typically issued by corporates of lower quality, high-yield bonds tend to pay higher interest rates than investment-grade bonds and a well-managed active allocation can play an important role in portfolios.
Historically able to provide equity-like returns with lower volatility,1 due to the potential for high and regular coupon payments, high-yield bonds may be a particularly compelling option for investors who are not yet comfortable leaning into equities for growth or who wish to derisk from equities.