Nick Gartside, international chief investment officer for global fixed income at JP Morgan Asset Management, looks at what 2012 will hold for fixed income markets in 2012: Back to the Future?

Many wealth management strategists have taken a wary view of fixed income assets for 2012 although they are particularly downbeat on Western nations’ sovereign debt and friendlier towards corporate and emerging market bonds.

Nick Gartside's favourite areas are high-yield debt, agency mortgage-backed securities and AAA-rated commercial mortgage backed paper.

“2011 has been characterised by a lack of a big trend in markets and has been punctured by periods of both optimism and pessimism. This could well be a good roadmap for 2012. Expect more volatility, expect your fixed income manager to more nimble when it comes to asset allocation,” Gartside said in a note. 

He said although the economic position at the start of 2012 appears similar to how events appeared a year ago, there are differences building.

“Scratch beneath the surface though and the balance of risks has shifted significantly. A year ago we forecast an equal probability of 15 per cent each for the twin tail risks of double dip and closing the output gap. Zoom forward to today and above trend growth has just a 5 per cent probability and the negative scenarios of recession and crisis have 20 per cent and 10 per cent weights respectively,” Gartside said.

“Why the change? A lot is due to the relative importance of macro factors versus the policy-maker response. Put simply, politics now matters more for markets and investors are demanding a greater risk premium to compensate for elevated political risk. Away from the politics the underlying economic picture is okay and is not too dissimilar, at a global level, to that of a year ago and suggests positive, albeit sub-trend, growth,” he continued.

“Against this backdrop further policy easing is likely from both the developed and developing world, which coupled with our leading inflation indicators pointing to declining inflationary pressures, provides a positive backdrop for fixed income,” he added.