Insights and Market Perspectives

Finding opportunities in bonds, tariffs be damned

Author: Jean Charbonneau

October 10, 2018

One of the biggest fears gripping markets so far this year has been the introduction and escalation of tit-for tat tariffs by the U.S. and its key trading partners, but bond investors do not have the same worries as their equity-holding counterparts.

While trade-related risks can produce adverse effects across all asset classes, the current environment offers an opportunity for those who take a more active approach to investing in their fixed income portfolios.

From a credit perspective, for example, we’re especially mindful of the fact that tariffs may have a long-term dampening effect on GDP projections and lead to upward shocks for inflation and adjustments to fiscal positioning. And because all of these factors can affect interest rates and the volatility of pricing across bond markets, it has become even more critical for us to focus on security selection that takes into consideration free cash flow metrics.

To that end, we have seen a number of companies reduce their plans for capital expenditures in light of the uncertainty around trade, which has resulted in more stable free cash flow projections.

This could be viewed negatively at the stock level, but it also strengthens company balance sheets and the viability of servicing debt obligations, which, from a fixed income point of view, represents a clear positive for bond holders.

Ultimately, companies able to withstand and overcome short-term trade headwinds – for instance, by producing the same or substitute goods in sectors now facing import restrictions – have the opportunity to outperform their competitors.

But it is the ability to identify and add exposure to these names that can give active fixed income investors a leg up in tense times for international trade relations.

Jean Charbonneau is a Senior Vice President and Portfolio Manager at AGF Investments Inc. He is a regular contributor to the AGF Perspectives blog.

Commentaries contained herein are provided as a general source of information based on information available as of Oct 5, 2018 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.

About AGF Management Limited

Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.

For further information, please visit AGF.com.

© 2018 AGF Management Limited. All rights reserved.

Written by

Jean Charbonneau, MBA

Senior Vice-President and Portfolio Manager

AGF Investments Inc.

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