Emma Wall: Hello and welcome to the Morningstar series, 'Why Should I Invest With You?' I'm Emma Wall and here with me today is Nick Hayes, Manager of the AXA Global Strategic Bond Fund.
Hello, Nick.
Nick Hayes: Good morning. Thanks for inviting me in.
Wall: So we are here to talk about what 2014 holds for bond investors. Looking just at 2013, emerging market debt lost investors' cash for the first time in five years. Does this mean then there are now buying opportunities in the asset class?
Hayes: Yes. I think there's definitely buying opportunities. I think the thing about emerging market debt is it's an asset class that has many different facets, so different risk factors. So there's lots of bonds that have long duration and quite tight spreads. There is other debt that is much more about credit spread and then there's also the element of local or FX. So within that, I think there's, opportunities in the shorter duration much more credit spread type element. I'd be still quite wary of overall duration, and then obviously FX will be very volatile, which I think is partly why we saw lots of outflows last year. People were surprised by all the sort of volatility seen in this local and FX area.
Wall: Because that referred to tapering.
Hayes: Yes. Tapering started it. I think we've also seen the effects of QE, which is, reduced yields, lots of people chasing high yields, and over the course of last few years, people have just piled into emerging market debt and gone to much riskier debt. I think last year was a bit of a wake-up call. They realized they were in a very volatile asset class, and therefore they saw lots of outflows.
Wall: From one end of the bonus spectrum to the other then, looking at gilts. They've been in and out of favor over the last couple of years. If you look back some 1998, 10-year gilt yields were 6% plus down to 2%. What does 2014 hold?
Hayes: I think it's pretty difficult to be really bullish on gilts. They do yield very, very little. They have started to increase sort of 100 basis points or so rising yields. But I certainly wouldn't rule them out. I think there's an environment now, where people are so bearish on government bonds that they kind of discounted them at any price. And actually think that, yes, we are trying to see an economic recovery. Yes, they have talked about interest rates staying low for very long period of time.
But ultimately, I think there's a period maybe where they will come back into favor this year. They'll be a period where people start to think, is the price of high yield correct or should I actually be reinvesting further up the credit spectrum. So, it's difficult to be bullish on gilts definitely, but I wouldn't rule them out certainly.
Wall: You mentioned high yield there. A lot of bond bulls are saying this is the sort of savior of the bond market. This is where the opportunities lie. Can we take a blanket view like that or do you have to be selective over high yield like you do about corporate bonds?
Hayes: Yes. You certainly need to be selective. But it's difficult not to be most bullish on high yield within the entire fixed income asset class. If you look at the returns last year, we got 10% from high yield, which is pretty attractive in an asset class that yielded sort of 5% or 6%. We are now in an environment where they yield less than that. So we still like high yield relative to gilts, relative to investment-grade.
But I think definitely, we're in the kind of zone where the price is starting to look a bit expensive, and that might tighten for a period. But there'll be a period this year when high yield will sell off and there'll be a period where lots of investors will end up buying much more high yield than they should do. So, we like high yield. We think it's a relatively good asset class compared with some of the other parts of the bond market. But we're relatively worried that we are coming towards the end of a very, very strong run.
Wall: So be vigilant.
Hayes: Be vigilant, absolutely, and it comes down to the sectors, it comes down to names obviously, and the issuance has been fairly aggressive. We are starting to see some of the more maybe aggressive names or good quality names issuing with weaker covenants. So we're being fairly vigilant on the new issue market.
Wall: Nick, thank you very much.
Hayes: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
