Asset Allocation

The era of negative interest rates on government bonds is over, but the moment when government bonds will again generate both portfolio protection and returns is still far away. Especially in Europe, the situation is tough. The ECB has its hands tied. The need to save Italy means Eurozone interest rates can only rise so much. “Make no mistake about it: the next six months won’t be pretty.”

Factor investing, an investment approach that involves targeting specific drivers of return across asset classes, is attracting increasing interest from investors. Factors such as value, size and momentum have a long history in the investment world and have been extensively empirically researched and documented in the academic literature. Although there are different variations for these factors as well, the factor quality is perhaps the most debated, both in academia and in practice.

Low-risk stocks do better in the long run than high-risk stocks. For the record, this story equates risk with movement or, in stock market jargon, volatility. In itself, this is not the correct definition of risk. The flip side of risk in the form of volatility is opportunity.

Pauline Grange (Columbia Threadneedle) emphasises the opportunities that currently exist in the market to take advantage of European efforts to improve energy autonomy in Europe. 

The erratic first half of 2022, which sent leading stock market indices into bear market territory, has clearly left its mark on the fund universe. Fund houses active in the bond markets saw a general outflow of investor money, and although on balance equity funds attracted investor interest, large differences could be seen at the category level. Active funds did not appeal to investors, while the least sustainable investment funds were also out of favour.

Europe’s energy supply is under severe pressure, and the 8.9% inflation rate in the eurozone seems to be cushioned only by sharp increases in interest rates, which could push the European economy into recession. Is Europe still the continent you want to be in as an investor?

Although the European economy had a relatively good second quarter, with economic volumes up 0.7% on the first, concerns for the second half of the year remain high.

With a recession looming in Europe, investors again are on the lookout for suitable safe havens. Ethenea’s investment strategist Andrea Siviero, who manages the firm’s 60-million-euro Hesper Fund - Global Solutions together with Federico Frischknecht, believes the Swiss franc and the Japanese yen are well placed to take up this role, as the Fund has1a position in December 2023 Euribor futures that anticipates the ECB won’t be able to raise rates next year as much as currently discounted by the market.

With a first-half loss of 7 percent when measured in euro, the GBI-EM Global Diversified Index, the benchmark for emerging market bonds, was by no means the worst student in its class.

The past six months have been one of the toughest for bonds ever. Especially long-dated bonds have taken a beating. The Bloomberg Euro Aggregate 10+ Year index fell by no less than 23.6 percent while the Bloomberg Euro Aggregate 1-3 Year index was “only” 2.9 percent lower.

As US companies revise their earnings forecasts en masse and fears of recession-induced defaults increase, some investors feel it’s a good moment to get into high yield corporate debt. The key question: what will be the nature of the upcoming recession?

“A rare opportunity to get into high yield,” noted bond strategist David Furey of State Street Global Advisors in a market review last week. “A fantastic buying opportunity for US high yield,” said Dutch investment advisory firm Candoris. 

While Canadian and Australian pension funds are set to increase their investments in infrastructure assets in the years ahead, their European counterparts are slow to recognize the benefits of this asset class, potentially missing out on additional returns they could achieve for their clients.