Long-term interest rates will continue to rise, as will inflation. And the correlations between German government bonds and equities will become positive again. That’s a tough sell for the management of multi-asset portfolios. Fortunately, there are alternatives such as swaps and floating rate notes. And value stocks are preferred in an environment of rising interest rates and inflation.
This is evident from an interview with Vincent Mortier (photo), Deputy Chief Investment Officer at Amundi. His asset allocation is more cautious than usual and also more selective.
According to him, the reflation trade will continue, with value shares in particular profiting from higher long-term interest rates and ditto inflation. “Note that not all value is interesting. We leave the deep value, because it is cheap for a good reason. We rather look for good quality value with healthy balance sheets. Rather cyclical growth companies. The banks have risen enormously in the past year and we find them too expensive. The credit risk has been nationalised but will come up again at some point.”
Technology
The overweight position in value does not mean that the manager is neglecting growth stocks. Mortier favours Asian technology stocks, which have already digested the effects of tighter regulation. They are more attractively valued than their US counterparts.
Selective dividend stocks can also count on Mortier’s approval.
Fixed income
Mortier is cautious on bonds. “We are underweight relative to the benchmark and currently see potential in floating rate notes. We think 10-year Treasury yields will continue to rise towards 2.10 to 2.30 percent by the end of the year. That is a bold position because it is not in line with consensus expectations.”
The team was also underweight the USD at one point but has turned neutral to slightly positive in the short term. In the long term, however, he sees the USD falling rather. “The Bank of China is steering exchange rate policy to keep the yuan from rising too much.”
Chinese government bonds are an undervalued asset class, according to Mortier. “They currently yield 2.5 per cent more than inflation, while in the US and Europe they are negative after inflation. Moreover, the Chinese currency will continue to rise, in our opinion. Compared to the US and Europe, you therefore have a real yield difference of 4%.”
Mortier thinks high yield is expensive. “There is more chance that the spreads will increase than decrease. So it is an asymmetrical investment profile. Whether investment grade is expensive depends on your perspective and investment horizon. In the long run, it still remains a relatively attractive asset class.”
Gold is also worth a limited 5 per cent position in Amundi’s portfolios.
Emerging markets
Mortier and the Amundi team see potential in North and South Asia as a region, but tend to stay away from Latin America, despite relatively attractive valuations. Russia is a play on oil where they also see caution. And in Turkey, they see mainly risks.
Future
Mortier is cautious about the future. “I see the correlation between Bunds and equities increasing again. Rising interest rates and falling equity prices are a tricky combination for the management of multi-asset portfolios. Fortunately, you can cushion that with interest rate swaps and by investing in floating rate notes. Buying protection is also cheap. Put options on volatility are attractive at the moment.”
Equity indices are generally expensive, so it is important to be selective and to invest actively. By mid-2022, the strategist sees growth in the US falling back towards its potential, notably 2 per cent, and in Europe even below 2 per cent. This coincides with rising inflation, which Mortier says is also the result of the Fed’s policy, which is committed to inclusive employment. As a result, the employment rate is rising and so are wages. Rising rents also weigh on inflation. “Finally, don’t forget that the US and Europe will start importing inflation from China. Many market observers still underestimate that.”
The full Amundi outlook paper can be found attached below.