Sector Views: Signs of progress, signals of caution

The US economy is expected to experience moderate growth, driven by consumer spending, which may reduce the necessity for aggressive Federal Reserve rate cuts. However, potential policy changes under President-elect Trump, such as increased tariffs and immigration restrictions, could introduce inflationary pressures. In Europe, economic growth remains a concern, with the European Central Bank likely to implement more rate cuts compared to the US.

Despite low spreads in some fixed income sectors, opportunities exist in securitized sectors, which can offer diversification benefits. The Fed's approach to rate cuts is anticipated to be more measured and targeted, influenced by higher inflation expectations resulting from policy uncertainties and persistent inflation readings.

The upcoming Trump administration's protectionist policies, including higher tariffs and immigration limits, are expected to reinforce US "economic exceptionalism," impacting fixed income sectors. With US corporate bond spreads at historical lows, there is significant risk exposure in the Bloomberg US Aggregate Index in the event of spread widening.

The overall risk outlook has been adjusted to neutral, supported by an improving US economy. Investment strategies are focusing on fixed income positions that offer positive interest rate carry, aiming for returns independent of yield movements. Lower-quality corporate bonds, while tightly spread, are seen as less vulnerable to policy surprises, with reduced bank regulation benefiting securitized products. Conversely, non-US corporate credit and emerging market bonds may be significantly affected by US policy shifts, necessitating careful selection of insulated sectors and issuers.