Bond investors wary of when the Fed might start adjusting interest rates, and how far that action may go, might want to consider opportunities elsewhere. That's the verdict of bond managers at T. Rowe Price, who are warning that investors should lower their expectations for U.S. bond performance in 2015 but look to opportunities abroad.
Diverging central bank policies outside the U.S. and the needs of economies that aren't following the U.S. blueprint could offer chances not just for yield, but for diversification that could, despite volatility risks, provide greater portfolio stability.
According to Stephane Fertat, fixed income portfolio specialist for T. Rowe Price, there is likely to be considerably more divergence between central bank behavior abroad and what the Fed will do, and that opens up opportunities. Some are presented by the fall in crude oil prices and falling interest rates, while others come from quantitative easing programs.
More emerging market countries may be the "clear beneficiaries of the lower oil story," according to Fertat, who said that "in particular, India, Indonesia and Turkey are really benefiting from that backdrop—and [that's] why, when we think about where we'll put money globally, it's very much on a case-by-case basis."
Fertat said that the value in looking outside the U.S. is in looking for duration in Europe or in emerging markets. He said that while markets and investors "have been blessed with very good returns on fixed income, they may have forgotten the true role of fixed income in asset allocation. If you go back to the basics, what it should provide is low but steady stable income. It is there to provide liquidity and to provide diversification against equity markets."
Value enters the picture through "keeping some duration in fixed income allocation. You want diversification to play out, if tomorrow we have a fall in equities. Just because interest rates are low doesn't mean you should slash duration in your portfolio; it's a diversification tool."
For investors willing to take on risk and accept volatility, Fertat said, "credit has strong value. However, if [they're] worried about downside protection and diversification, this is where [they] should move more into global governments."
Currency, of course, is another part of the picture. While Fertat said that in general T. Rowe Price is looking for opportunities to put more into emerging market currencies because of the fall in oil prices, "Turkey is an example of where the currency has done better" some markets are suffering because of it, such as Brazil, Russia and Venezuela. "For us, it's much less [about] emerging market investment as an asset class, and more about picking winners and avoiding losers within that vast category of EM." Brazil, for instance, is a "tense situation for a country with practically no growth and a high level of inflation. It doesn't look good for Brazil in the short term, and they will really need to turn around their growth forecast for the market to look more attractive from an investor point of view."
