The Investor 90

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WELLINGTON MANAGEMENT

Gilts

UK Gilts

Near-term interest rate rise looks

unlikely following referendum

WASATCH

Emerging Markets Equity

Infrastructure projects set to boost

demand for Indian goods and services

Secondquarter of 2016

sees slowinggrowth

andhighvolatility

Indiao ers some

attractive investment

opportunities

Ajay Krishnan and Roger Edgley

Haluk Soykan

TWENTYFOUR

Joint manager: Diversified Bond and

Strategic Income

European fixed-income markets

weak, providing potential value

All eyeswill be on the

BoE andECB, following

the Brexit decision

Eoin Walsh and Gary Kirk

ith the decision to leave the EU

just days old at the time of

writing,market participants are still in

the process of quantifying the

rami cations for the UK and EU

economies and the markets.

Away fromBrexit,Q2 2016

generally saw a continuation of the

constructive tone of the end of Q1,

with risk assets enjoying a reasonable

recovery,with European high-yield

returning 2.6%, and euro nancials

up 1.05% quarter-to-date. Sentiment

was clearly supported by the expanded

European Central Bank (ECB) asset

purchase programme, particularly the

decision to purchase corporate bonds;

as a result German 10-year bunds

traded with negative yields and euro

corporates returned 1.3%.

All eyes will now be on the BoE and

ECB as they attempt to minimise the

negative fallout from the Brexit

decision, and interventions in the

markets will be highly likely if the

uncertainty threatens to negatively

impact global growth.While markets

are likely to remain volatile in the

medium term, income is now an even

scarcer commodity as‘risk-free’ assets

trade at even lower yields. Bond prices

should recover over the medium term.

he second quarter was volatile as

slowing global growth was

exacerbated by the uncertainty

surrounding the UK’s EU referendum.

The US released some positive

economic data and despite signs of a

slowing economy the Fed’s rhetoric

was hawkish.The ECB continued its

accommodative policy as, despite an

acceleration in the economy during Q1

andmanufacturing growth surprising

on the upside, PMIs pointed to slowing

growth inQ2 and falling economic

con dence.China’s manufacturing

and services PMI fell. Japan’s PMI

remained in contraction while a falling

CPI put pressure on the Bank of Japan

to consider stimulus.The Reserve Bank

ofAustralia cut its benchmark rates,

following a drop inAustralian

consumer prices.UKmanufacturing

fell into contractionary territory for

the rst time sinceMarch 2013.

The UK economy remains

characterised by low in ation and is

unbalanced due to a current account

de cit and an overvalued house

market.The referendum’s outcome is

likely to correct these imbalances

rapidly as investments into the UK are

reconsidered.We

therefore feel a

near-term rate hike is unlikely.

upported by favourable

developments, pro ts of Indian

companies have been

rising.As

the

largest country weighting in the

portfolio,we believe India o ers some

of the most attractive investment

opportunities in emerging markets.

Debt levels of Indian companies seem

poised to decline, just as government

infrastructure projects boost demand

for a variety of goods and services.

Shrinking scal de cits, lower in ation

and higher foreign direct investment

also contributed to the improved

economic backdrop.

Much hinges on the government’s

success in implementing its agenda for

reform:we think recent gains of Prime

Minister Narendra Modi’s Bharatiya

Janata Party in state elections have

increased the likelihood for political

consensus.The most sweeping

legislation stalled in its parliament is the

Goods and ServicesTax, which would

replace the indirect-tax framework

that many believe has suppressed

India’s tax revenues, economic growth

and international competitiveness.

If the Modi administration can deliver

on this and other key initiatives, India’s

secular growth story may still be in

its early chapters.

THE INVESTOR