Asset Allocation

Gold is playing its traditional role in the flight to safety and rose above 2000 dollars per troy ounce this week. There was disappointment last year when the gold price reacted poorly to sharply rising inflation, but Ukraine has pushed up the price. Gold thrives best at times of  chaos, but it is not a good hedge against inflation.

A global macro strategy seems the place to be in the current extremely volatile stock market climate. But beware, if you do not combine global macro with micro factors, you are doomed to fail, says Christopher Govaerts (photo), chief strategist at Belgian private bank Nagelmackers. Specifically, British equities and emerging markets such as China and Brazil now offer a counterweight.

Russia ETFs or funds are dropping out of the market in droves. Some are still open, as market makers manage to keep them barely alive. But for how much longer?

Worldwide net inflows into Exchange Traded Funds with an Environmental, Social and Governance (ESG) profile fell to 9.8 billion dollars in January compared to 19.8 billion dollars the same month a year earlier, according to London-based research firm ETFGI.

The firm said ESG funds now have experienced 37 consecutive months of net inflows.

Issuance of ESG debt in Europe almost doubled last year as more sovereign and supranational issuers entered the market and governments adopted sustainable finance programmes. The Association for Financial Markets in Europe sees more growth this year due to greater participation by the corporate sector and the potential of the ESG securitisation market.

Investors awaiting higher yields on government bonds have systematically been missing out for four decades. While market rates are rising, bondholders remain on the edge of their seat. With central banks set to tighten monetary policy, the question is: who is going to buy government bonds?

European mutual funds that promote green investments saw assets increase by some 22 percent in the fourth quarter, to more than 4,000 billion euro, and will overtake traditional ‘grey’ assets in terms of asset volume no later than the summer of 2022, Morningstar said in a research report on the effects of the SFDR sustainability regulation introduced last year.

Record levels of funds invested into private asset strategies has led to the phenomenon of “too much dry powder” in which new investments fuel higher entry valuations for the slower-growing number of underlying investment opportunities. Nils Rode, Schroders Capital’s Chief Investment Officer, explained that avoiding this involves locating successful investments, those that benefit from a “complexity premium”, as private assets move into a new phase.

In the search for yield, some high yield investors are shifting to a broader mandate to invest in “below B”, the riskiest segment of high yield. PGIM recently repositioned two high yield funds to invest in CCC and CC bonds.

2022 will be another exciting year for financial markets. Investors operate in an environment of persistent inflation, foggy central bank policy and uncertainty about the Omicron variant. It is a search for yield and protection in the portfolio. But how?