Insight Investment

People are excited about stablecoins and digital assets for a range of reasons, but the real revolution lies in the transformation of payment infrastructure. With near-instant settlement, 24/7 global reach, programmability, transparent on-chain auditability and low transaction costs, this could drive the biggest shift in market infrastructure since SWIFT. However, regulation is diverging – the US is leading on issuance and clarity, while Europe and Asia are developing separate frameworks, pointing to a fragmented global system.

Europe’s household savings are a potentially powerful but currently underused source of capital. The capability that exists in the European fund industry could channel savings into key political priorities like innovation, defence and the energy transition. We believe securitisation can play a central role by helping banks recycle capital, increase lending to households and businesses, and possibly also create attractive income-generating assets for investors. However, in our view, the current regulatory framework is overly complex and restrictive, holding back both supply and demand. Reform is needed to potentially unlock investment at scale and speed, strengthening Europe’s economic competitiveness, growth and long-term financial independence.

Recent events in the Middle East reinforce how quickly market narratives can shift, with expectations swinging from rate cuts to hikes in a matter of weeks. This is yet another example of how unpredictable the world has become, and in this environment, building resilient portfolios is critical. We are seeing increasing demand for short-duration credit and absolute return strategies, which are currently less exposed to volatility at the long end of yield curves – particularly given continued heavy government issuance. At the same time, money market funds are playing a more prominent role as stable portfolio anchors, providing liquidity that can be quickly deployed as opportunities arise.

Emerging market corporates have remained resilient through the Middle East conflict, supported by stronger fundamentals going in. The countries most exposed to the energy price shock largely sit outside the corporate universe, while energy and commodity producers – typically corporate issuers – have benefited. We are particularly positive on EM high yield, where the market continues to see net negative issuance. As inflows return, investors are competing for a shrinking pool of assets, reinforcing the strong technical support.

We believe tax-equivalent municipal bond yields look attractive relative to both investment grade and even high yield corporate bonds, despite municipals typically having higher credit quality (around AA). However, the main challenge is finding the best value, which is currently concentrated in longer-dated bonds, particularly around 20-year maturities. It takes flexibility to access these opportunities. One way to achieve this is by combining shorter-dated, laddered portfolios for stability with more flexible municipal bond strategies that can target value further out on the yield curve.

Being forced to sell assets early in retirement to fund spending can cause lasting damage to retirees, to both their portfolios and their confidence. Retirees respond to this risk by spending less than they could. One way to address this is to use reliable, personalised cashflow strategies that match income needs without the need to sell, helping to shield equity portfolios from sequencing risk while retaining flexibility if circumstances change. In our view, this approach can give clients greater confidence to spend, with less concern about market timing.

Despite a tightening in spreads, new issuance is often pricing below initial indications given strong demand. We like European chemical companies at the moment, where domestic demand is being supported by China’s difficulties sourcing feedstocks, and plants are running at high rates. We’ve exited names we believe are vulnerable to higher energy costs. Despite the geopolitical and macro uncertainty we continue to see issuers refinancing into debt with significantly higher coupons, providing us with opportunities to increase the average coupon and hence, carry for the fund, and providing us with ongoing investment opportunities. The loan market is also exceptionally active, with some issuers shifting away from private markets to tap into the strong level of demand.

The high yield market’s overall exposure to AI-related debt is modest relative to investment grade credit, and even more so relative to large cap equities. Despite this, AI-related high yield bonds tend to offer a spread premium. Diligent security selectors may be able to pick up AI related issuers with yields currently around 9% in US dollars. This may offer the best of both worlds, potentially significant security selection opportunities, but relatively low overall sensitivity to the fate of the AI sector across the asset class.

After a brief widening during the energy price spike, credit spreads have since retraced. With earnings momentum robust, absolute yields still attractive, and supply likely to ease in the second half of the year, we believe credit markets should remain well supported through year-end. This resilience has come despite heavy issuance in April, driven by ongoing AI-related funding needs and a pickup in M&A activity. Although spreads appear firmly underpinned, it’s also hard to justify adding more risk at these levels, so we’re keeping risk at modest levels.