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Federal Reserve could disappoint, says FE Alpha Manager

14 August 2024

Nomura’s latest outlook cautions against pricing for multiple Federal Reserve rate cuts.

By Patrick Sanders,

Reporter, Trustnet

Recent predictions of multiple rate cuts by the Federal Reserve this year may prove disappointing for investors, according to FE fundinfo Alpha Manager Richard Hodges, who runs the $2.3bn Nomura Global Dynamic Bond fund.

His base case is that the Fed will indeed cut rates, allowing other central banks to follow suit, but he is less confident than the market. He noted that multiple rate cuts are priced into the remainder of 2024, something that gives “ample room for disappointment”.

In addition, in the short term the Alpha Manager predicts that political uncertainty in this big year of elections, and less liquid summer markets, will lead to much greater volatility in the fixed-income market.

For this reason, Hodges continues to prioritise its existing investment strategy, focusing on allocations that are low-risk and could adapt to unexpected decisions from the Fed.

For example, the fund will continue to use credit default swap (CDS) index-based hedging to protect investors against a change in risk sentiment. This CDS-based protection accounts for almost 30% of the portfolio.

Additionally, the fund has significant exposure to European banks and financials such as Barclays, which is currently the firm’s sixth-largest holding.

This exposure to senior financials offers low risk if the Fed chooses not to cut rates further, but also provides the potential for stronger returns if a more aggressive campaign begins, he said.

Performance of Fund vs the sector

Source: FE Analytics

However, over the longer term he remains confident on the prospects of bonds, particularly those at the riskier end of the market. He noted that rate cuts will “lead to a positive environment for a wide range of risk assets”.

As such, the fund has positions in emerging markets, convertibles and European financials that will
“benefit from the realisation of that environment”.

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