The year 2024 began with notable optimism on the part of fixed income investors, who anticipated between 6 and 7 rate cuts by the end of the year by the ECB or the Fed. However, the strength of the macroeconomic data and the Improving inflation figures, especially in the US, refocused attention on the idea of ”higher for longer.” Although the ECB carried out its first rate cut at its June meeting, according to AXA IM manager Johann Plé, there is a need to be cautious with the next steps.
“The eurozone manufacturing sector continues to face difficulties, but overall growth is expected to stabilize due to the rebound in the services sector,” says the manager. “The US economy continues to show few signs of significant deterioration, while inflation has surprised on the upside for three consecutive months,” he continued. “Against this backdrop, We must continue to expect a high level of volatility in the coming monthsas market participants could further doubt the ability of the Fed and the ECB to implement their respective rate cuts, currently planned at 2-3,” he explains.
“The next few months will be really crucial. Either inflation slows without a significant drop in growth, and central banks can ease their monetary policies, which would be most favorable for bonds. Or, inflation is once again more persistent than expected and investors begin to fear the shadow of stagflation, which would not only prevent raising rates, but would curb the current appetite for credit risk,” he analyzes. ” “Meanwhile, geopolitical risks remain high and the outcome of the US elections at the end of the year remains highly uncertain,” he says.
Fixed income: where to find the best opportunities
Taking all these elements into account, according to Plé, volatility should prevail in the coming months. “This environment should create opportunities for flexible fixed income strategies with active duration managementcapable of taking advantage of market hype and decorrelation of market movements,” he says.
Furthermore, according to the manager, European fixed income could be the right place to gain exposure to bonds. “Despite the strong performance of the last six months, which has brought spreads closer to the minimums of 2022, asset class returns remain near all-time highs“, he argues. “However, investors should remain cautious, as they get fewer profit opportunities by taking on additional risks,” he says.
“The spread between high yield and investment grade debt is reaching multi-year lows, making investment grade credit more attractive. We also see a similar trend when we compare investment grade credit to quasi-investment grade debt. sovereign, which makes the latter an attractive but more defensive alternative.
In this context, The key to getting the most out of European fixed income is undoubtedly to consider a diversified approachin order to balance risk across multiple return drivers, without ignoring inflation-linked debt, which currently offers a very attractive carry profile, while acting as a hedge for tail risks,” says the manager.
AWF Euro Strategic bond, characteristics of the strategy
Johann Plé is the manager of the AWF Euro Strategic bond fund with rating FundsPeople 2024. This strategy invests across the European fixed income market with a flexible and unrestricted approach. Plé describes the fund as “an all-weather vehicle” that can exploit all the main drivers of returns, focusing on the relative value between sovereign, quasi-sovereign, hedged, credit or inflation-linked debt. The fund has ample scope for duration management, allowing it to tactically decouple from the rates market to limit downsides.
“Its benchmark-agnostic approach sets it apart from most aggregate strategies, which invest in the same asset classes but tend to be highly correlated with rate movements. due to a longer structural life,” says Plé.
“Its focus on Investment Grade debt makes it a more defensive option than other flexible funds that tend to rely significantly on High Yield debt,” he continues. “The ability to invest in inflation-linked debt allows for greater diversification of the source of returns. This makes the strategy particularly suitable for investing with conviction where there is value, while having the agility to navigate a high-risk environment. volatility,” he points out.
Portfolio update
Since the beginning of the year, the strategy has been rather dynamic in terms of duration, while optimizing portfolio performance through a significant allocation to credit. “With regard to duration, we have favored a tactical approach rather than taking significant directional positions,” says Plé. The fund has ranged from a duration of 2 years to 5.5 years, and currently stands at 4.5 years, reflecting a cautious but constructive view on rates.
In terms of allocation, credit still represents more than 50%, with approximately 10% coming from high-yield debt. Recently, global credit exposure has been reduced to better balance risk, favoring quasi-sovereign and inflation-indexed debt. “The latter should act as a buffer in case of new upward surprises on the inflation front and offer attractive carry in the coming months,” says the manager.
Finally, regarding sovereign debt, the portfolio adopts a rather cautious stance with respect to European countries and tends to favor diversification towards certain emerging countries whose euro issues offer a significant improvement in performance compared to similar ratings.
