Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Charles Zerah, fund manager, Carmignac Portfolio Global Bond fund.
Currently, the world’s bond markets aren’t moving in a uniform direction. In America, after a few decades in which bond yields were mostly falling (and so prices rising), yields now look set to rise as better macro-economic data trickles in and the US central bank, the Federal Reserve, moves closer to raising interest rates.
In Europe, by contrast, yields seem to be heading lower as the European Central Bank (ECB) finally delivers on its much-anticipated monetary easing. This summer, ECB boss Mario Draghi promised to fight weak inflation and slowing growth with rate cuts and unconventional monetary policies.
He’s followed through on both promises by cutting ECB interest rates and announcing a plan to buy ‘asset-backed securities’ – mostly repackaged mortgage loans – from the banks. This has pushed rates lower across the eurozone and should keep them low for some time.
In Japan, the aggressive support provided by the Bank of Japan (BoJ) in 2013, which included quantitative easing, helped the country temporarily to reach its inflation targets. No further measures have been announced yet this year, but the BoJ looks ready to act if necessary.
Meanwhile, in emerging markets, we are seeing increased differentiation between countries, in terms of central bank policies. The likes of Mexico are easing rates, while South Africa has tightened monetary policy further.
What should a bond investor do in this environment? It’s important to adopt a diversified, global approach, rather than focus on one region, which can be vulnerable to changes in local conditions.
Flexibility is also crucial – for example, the freedom to go short on some currencies (ie, bet that a currency will fall) allows funds to generate returns across diverse market conditions.
It’s also useful to be able to invest in areas that will benefit from rising rates. And it’s important to take opportunities when you see them arise.
When we believe strongly in a particular investment, we take a relatively large position, rather than stick with a balanced allocation that is close to the fund’s benchmark. We do this because it is the best way to generate a strong performance. This approach allows us to unearth pockets of value in different market conditions while seeking consistent returns.
One such investment idea is our continued preference for ‘peripheral’ sovereign bonds. In other words, we’re positive on bonds issued by countries that are on the edge or periphery of the eurozone. These include Greece, Spain and Portugal.
While peripheral yields have declined considerably over time, we think there is still potential for further convergence with rates in ‘core’ countries, such as France and Germany.
The recent strong support from the ECB has, to an extent, helped. This is why we like the Spanish government’s 4% 30/04/2020 bond (ISIN ES00000122D7), which has a BBB rating. We also think that bonds issued by European banks are attractive.
The eurozone’s strategy of reducing the vulnerability of the financial system via better regulation and forcing banks to repair their balance sheets has driven healthier valuations. That’s why we are invested in the Barclays 8% 12/15/2020 (B rating – ISIN XS1002801758).
While we carry out bond investments, we don’t neglect currency positions that help us to boost returns and protect against sharp, sudden declines. One example is our long exposure to the US dollar (ie, we’re betting the dollar will rise).
The differences between the US and Europe on interest rates, economic growth and monetary policy make us positive on the dollar. It’s already started to benefit from the ECB’s latest moves, as well as a potential rise in US rates in the coming months.