Long duration trades are fading into the background because of tighter monetary policy. Markets have adjusted swiftly and find themselves in the middle of the cycle. The volatility that accompanies this is not necessarily disastrous, said Steven Vandepitte (pictured), asset allocation strategist at ING Private Banking.
Vandepitte believes that the US faces three to four interest rate hikes at most.
“Experience shows that aggressive rate hikes tend to be short-lived,” he told InvestmentOfficer.be. “The Fed will go for the golden mean and raise rates 50 basis points the first time. As for the Fed’s first rate hike, the situation is ‘in flux’ given 7.5 percent inflation. We can no longer rule out a rate hike if they do not make statements to the contrary. They talk the market.”.
Positive returns expected
Vandepitte and his team in November prepared their 2022 outlook under the title ‘The year of the hawk’. It did not take long for their outlook to materialise and for tighter monetary policy to be put on the table.
“This led to increased volatility and a sharp increase in the amplitude of movements. Volatility is not necessarily a bad thing, because it offers opportunities. We knew that the stock markets would correct, so tactically there was some room to buy in left and right. The reason why we did not go all the way was that we were afraid of a possible invasion of Ukraine by Russia. Nevertheless, we still foresee positive, though lower, returns this year.”
Oil market in backwardation
Vandepitte’s team also saw the inflationary wave coming and acted accordingly. They are holding on to the inflation-linked bonds for now, but with lower durations.
“We have also increased our commodity exposure by buying physical replication ETFs. The oil market is still in backwardation, so roll yields are not bothering us. We have also bought commodities, as materials such as copper and the like will continue to benefit strongly from the growth story in China, which needs materials for wind farms and hydrogen application.”
Mindful of geopolitics
“We are in a neutral position now slightly overweight in equities, around 52 to 53 per cent. If there are any serious tensions in the stock markets, we will certainly consider buying in. We are still mindful of the geopolitical situation.”
The team is also underweight government bonds. Positions in investment grade corporate bonds were somewhat reduced in favour of high yield. Within emerging market debt, there was a switch from hard to local currency. “We are now overweight credit compared to government bonds,” said Vandepitte.
Long duration trades unwinding
Unwinding long duration positions, which are sensitive to interest rates, is an important theme in the market, said Vandepitte. It is a phenomenon he observes in both equity and fixed-income markets.
“Everyone was heavily overweight in long duration in recent years. Just look at technology stocks that were able to discount their future profits into the present thanks to extremely low interest rates. That story has now ended, at least for a while.” he said.
Value trade present in Europe
This also explains why the strategist, pragmatically, has gone overweight in European equities, considered less interest-sensitive than the US. “We have not gone in blindly and remain selective here. The value trade is clearly present in Europe and could last for some time,” he said.
In Europe, his team is overweight in energy and banks. Vandepitte is not a big fan of gold, which, according to him, does not work very well as an inflation hedge and is more of a risk-off position.
This article originally appeared in Dutch on InvestmentOfficer.be: