(Jan 31): There was a period of time during the late summer when a reality seemed to dawn on many of our European clients — that the world of negative rates was not just a fleeting blip. It now appears likely that we could remain in a negative yielding environment for a number of years. But being caught in a new reality does not mean peril. My view is that we are not in imminent danger of a recession. Without an unforeseen shock, conditions for a widening of credit spreads or a sell-off of risk assets do not exist at this point.

As institutional investors reach similar conclusions, the way that they invest is adapting. In order to generate positive returns, many are beginning to consider pushing out their duration, moving down the credit spectrum, giving up liquidity or taking on leverage. This is pushing up demand for those asset classes that can offer steady, fixed income like returns, but may be out of traditional comfort zones or require more homework and risk management. These include private credit, high yield debt, emerging market debt, infrastructure and real estate.

Some of these asset classes have evolved in recent years and are now worthy of consideration for a wider range of investors. Included in today’s emerging market debt indices for example are countries with robust and relatively balanced economies, such as South Korea. Moreover, many companies in these countries are increasingly issuing local currency bonds, meaning they are more insulated from swings in the dollar as we enter an election year and an inflection point in Fed monetary policy.

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