With Great Uncertainty Comes Great Opportunities

What’s happened? Goldilocks is gone

Global fixed income appears to have exited its “Goldilocks” regime for a new macro regime. There is some uncertainty about which new macro regime will ultimately prevail. Our baseline scenario is that we will transition to the “Recovery” regime, but as tail risks we cannot rule out landing in either “Traditional Risk-Off” (growth left tail) or “Fear of the Fed” (growth right tail). 

Driven by the anticipated impact of the policy agenda under the new Trump presidency, this new regime is characterized by a 

Why is it important? Volatility is back

This transition will likely increase market volatility, reflecting the risks associated with greater policy uncertainty and reduced visibility over the impact of a Trump 2.0 agenda as well as future US Federal Reserve policy.

While conditions still appear supportive, we see two risks associated with fiscal policy:

How does it impact investors? Keep calm and stay active

The higher the uncertainty, the greater the volatility, and ultimately, the greater the opportunities for an active asset manager to take advantage of potential dislocations. 

Risk management is an essential part of the investment process given the significant range of risks. The risk of trade war escalation stands out as the key item to watch at this juncture.

Tight spread dispersion should support the importance of relying on strong fundamental analysis. The tighter the spreads, the greater the probability that credit fundamentals are being mispriced. In other words, the bigger the opportunity for skillful active managers to generate alpha through fundamental security selection.

Fixed income may regain status as a portfolio diversifier if the equity-bond correlation normalizes lower. 

At a more strategic level, fixed income is well positioned as an attractive de-risking asset class. Fixed income is back to providing attractive income and remains compelling given its risk-adjusted expected returns.

Source: Bloomberg Index Services Limited. BLOOMBERG^_® is a trademark and service mark of Bloomberg Finance L.P. and its affi liates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg neither approves or endorses this material or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

The views expressed herein are those of the MFS Strategy and Insights within the MFS distribution unit and may differ from those of MFS portfolio managers and research analysts. These views are subject to change at any time and should not be construed as the Advisor's investment advice, as securities recommendations, or as an indication of trading intent on behalf of MFS.

No forecast can be guaranteed. 

Diversification does not guarantee a profit or protect against a loss. Past performance is no guarantee of future results.