Prudent capital preservation should be top priority

GIVEN the abundance of risk factors weighing on the global economy and ageing business cycle, we think fixed income investors can benefit from a focus on active capital preservation.

Expected returns are the lowest they've been for decades, as asset prices have risen across the board and market volatility remains subdued. However, investors are remarkably optimistic and are pursuing relatively high-risk strategies in the quest for returns.

Income-hungry investors continue to search for yield, pushing prices of many risk assets higher. Valuations of corporate bonds, in particular, appear stretched, while quality has fallen and risks have risen. The result is that credit markets appear "priced for perfection" in a scenario that is far from ideal. Given the host of both secular and temporary factors weighing on the global economy, and the possibility that we may be entering the latter stages of a business cycle, fixed income investing should be focused on prudent capital preservation.