Fund managers switch to defensives and yen on expectations of further rate hikes: Morningstar

FIXED-INCOME and multi-asset portfolio managers are turning to more defensive sectors, while reducing equity exposure in anticipation of further rate hikes by the US Federal Reserve, going by a Morningstar report on Nov 4.

Some of them were also bullish on the Japanese yen, as they believe the currency will find its bottom, thanks to incipient inflation pressure and the Ministry of Finance or Bank of Japan intervention.

Others, including Australian fund houses Macquarie and Yarra, sought to diversify outside of core global markets, naming Australia and New Zealand as “attractive”.

UK-based asset manager L&G was particularly bullish on Australian bonds as it thinks that the Australian economy would not be able to withstand a similar pace of interest rate hikes as some of its peers. This means that current expectations about an interest rate hike are largely overstated on the Australian yield curve, hence making the market’s bonds attractive, said the fund’s managers.

“In general, managers are turning more conservative across the board – most managers are currently reducing their corporate credit exposure in anticipation of heightened credit-spread volatility; within multi-asset portfolios, many managers have reduced equity exposure and/or switched to more defensive sectors,” said Mara Dobrescu, Morningstar’s director of manager research ratings.