Every day, Natixis IM’s head of multi asset James Beaumont and his team wonder how much higher the equity markets can go. Yet, according to him, the issue that is keeping multi asset investors awake at the moment is something else. What should they do with government bonds?
In conversation with Fondsnieuws, Investment Officer Luxembourg’s sister publication, Beaumont speaks of two major concerns in that area. On the one hand, the return of inflation, resulting in rising yields and falling returns. On the other hand, a possible break of the negative correlation between equities and bonds.
“The second has not happened yet, although the correlation has become much more positive recently. Currently, you still lose money in bonds while you earn it in equities. But what if they both end up in negative territory? That is where we will go if inflation continues to rise.”
Especially the development of the inflation rate and the US and European bond yields play a major role in the further course of the two topics. Beaumont explained: “If the US ten-year rate climbs to 150 basis points, and moves towards 2 per cent, that could be a decisive factor.”
“Look,” he continued, “people like a bit of inflation and slightly rising interest rates. In Europe, it is perfectly possible for the 10-year interest rate to become positive again. If this happens in a controlled and gradual way, the markets will react positively. But if the rise in inflation or interest rates is sudden or goes crazy, we will reduce the risks in the portfolios. Everyone hopes for a goldi-locks scenario, but markets tend not to behave that way.”
Cash position
As head of multi asset, Beaumont is responsible for a portion of the €50bn Natixis Investment Managers manages through some 150 funds and mandates. Although the mandates and funds pursue different models, the multi-asset team has made roughly the same move for all funds in response to market developments, namely increasing the cash position.
“If we want to reduce our position in equities a bit as soon as the market goes down, we don’t want to invest that in government bonds now, nor in credits. That is why we hold a little more cash, 4 to 5 percent. That is not a huge amount, but normally we do not hold any cash at all. But yes, we don’t want to end up with ‘govies’.”
Everyone is talking about TINA again, said Beaumont: There Is No Alternative. “That seems to be back on the radar. For us, it’s mainly about risk management and as much diversification as possible. This is not the time to place concentrated bets.”
Alternatives
Besides cash, the investment team is currently focusing on alternative strategies with low volatility and liquidity. Beaumont elaborated: “These can make a comeback. For six years they were very popular, but in the last two or three years they have been struggling a bit, so the price level is better now. They can play a defensive role in a portfolio.”
“Incidentally, there are still opportunities within equities, according to the investor, despite the ever-rising stock market. Yes, we think on a daily basis about whether shares can go higher, but there is a lot of dispersion within the market. Last year, for instance, we were overweight in US equities, and the region outperformed a lot. But this year, we have reduced that position to neutral and are overweight in European equities. We have also been interested in value for some time, and in financials. And financial values.”
Tactically, Natixis IM has a slightly overweight position in equities for the multi-asset portfolios. Beaumont: “If equities keep going up, I think we will take profits, wait for a 5 to 10 per cent correction and then try to find opportunities through more overweight positions.”
In the medium term, his team remains constructive on the economy and markets. “We accept that now is the time to take risk off the table and look for a better entry point. We do not want to give away all the returns we have made in absolute and relative terms this year. We are still in the market, even if marginally.”