Investment Institute
La Versione di Iggo

Risk beats cash

  • 17 Maggio 2024 (3 min di lettura)

It’s been difficult for investors to move away from cash. However, the days of high cash returns are numbered. Rate cuts are back on the agenda. Fixed income credit strategies are more attractive than cash with short duration being the least risky step out of bank deposits. But everything is doing well. Rate hike and war risks have diminished and the soft landing scenario for the US economy is on track. Be patient and stay invested.

Cover those shorts 

Risk has been rewarded in May after April’s market stumble. Long duration fixed income has had a good month and some equity indices are at new highs. Concerns about geopolitical and monetary tightening risks have receded. Indeed, upbeat data and central bank rhetoric has seen confidence on the likelihood of seeing interest rate cuts this year rise once again. Even so-called meme stock trading is back. US day traders have been targeting heavily shorted stocks in order to provoke short-covering rallies and benefit from big price gains. Look at the share price of Faraday Future Intelligent Electric, a Nasdaq-traded electric vehicle manufacturer (up 1,300% in two trading days this week). It has been one of the most shorted stocks in the market. Meme trading, long duration, risk-on equities. Even Manchester United won a match!


Back to rate cut bets 

May’s strong market performance owes much to recent changes in interest rate expectations. Gone are the fears of US rate hikes. Indeed, the soft landing scenario for the US economy is as likely as ever. Year-on-year inflation rates for both headline and core consumer prices eased a little further in April. Retail sales were soft and the employment report was weaker than in recent months. In April the unemployment rate edged up to 3.9% (it had been 3.4% a year earlier). Bloomberg TV has dedicated much airtime to the weakness in consumer confidence indicators (a very disproportionate relationship between time spent discussing and the usefulness of that economic statistic).

In Europe, the inflation picture is also encouraging. Most countries reported stable or lower inflation rates in April. In the UK, because of lower energy prices compared to the last two years, April’s headline rate is expected to be much lower than March’s. Fixed income markets have loved the re-emergence of the rate cut story.


Flaming June 

Central banker messaging has also been helpful. US Federal Reserve (Fed) officials have dismissed the need for higher rates. Meanwhile European Central Bank (ECB) policymakers have steered markets to expect a rate cut in June. The Bank of England (BoE) has been less explicit but recent comments from Governor Andrew Bailey are consistent with the Bank also starting to cut rates next month. Markets are now pricing in two Fed cuts, and slightly more than two cuts from both the ECB and BoE before the end of the year.

This Goldilocks outlook is positive for markets. I doubt the backdrop will always seem as benign as it has in recent weeks but for now the risk rally looks set to continue to the benefit from credit and equity investors. Rates to ease, growth modest but positive and inflation generally moving lower.

Yield can equal return 

For fixed income investors, the current outlook is beneficial to a broad exposure to credit, including high yield. Credit spreads may be towards the tightest levels of recent years but the total yield for credit strategies is attractive. The last time US investment grade credit spreads were as tight as they are today was in the middle of 2021. Back then, the overall index yield was just 1.9% compared to 5.4% today. It’s the same story in the euro and sterling credit markets. As I have pointed out many times before, the initial yield on a credit portfolio with a duration of ‘X’ years is likely to be very close to the total annualised return so long as the holding period is also close to ‘X’ years.

Curves to move, but slowly 

The duration call from here is interesting. Rates are at their peak and the risk of additional rate hikes has disappeared for now. That should mean long-term rates (10-year government bond yields) are not likely to move materially higher than the range in which they have been trading this year. Thus, a long-duration stance is less risky today than it has been. This is reflected in short-term performance with long dated US Treasuries being the strongest performing fixed income asset this month.

However, long-term yields are unlikely to move materially lower either. Inflation remains above target and monetary easing will come slowly. Yield curves are still inverted and the shift towards flatter – and eventually positively sloped - curves will be driven by short-term yields coming down. In the pure rates space, short duration strategies have consistently outperformed longer duration strategies in both rising and falling interest rate environments. I looked at the relative performance of one-to-three-year and seven-to-10-year indices in US, German and UK government bond markets. The shorter duration bucket has been the better performer over the last 10 years. If yields on the shorter bucket fall to match yields on the longer bucket, returns from the short duration bucket should be stronger again (assuming long-term yields don’t move much).

Credit just looks good 

Looking at those same maturity buckets in credit markets provides a slightly different story. Over the last decade in the US, longer duration credit has outperformed short duration credit. Unlike the Treasury market, the credit curve has tended to be positively sloped most of the time, so longer duration returns benefit from higher yield (carry). In euro and sterling markets, shorter duration credit strategies outperformed over three-and-five-year horizons but not over the full 10 years, nor over the last 12 months.

Bonds vs. cash

The case for short duration credit strategies is strongest when compared to cash. Interest rates on cash have peaked and will decline over the next year. When rates are cut, remuneration on cash declines but bond prices rise. So, a short duration credit strategy benefits from having, today, the same yield as overnight cash rates but also the potential for capital gains when rates are cut and, perhaps, from the further modest tightening of credit spreads.

Volatility is low, liquidity is strong…no-one is selling 

I can understand investors that remain with large cash balances being frustrated by having missed a strong equity market rally and having seen credit spreads tighten. At the same time, there are convincing cyclical and secular reasons for investing today or staying invested. Another rate shock has a low probability. The macro backdrop in developed economies is benign. Commodity markets are calm. Equity markets, while making new highs in terms of price, are close to their average valuation levels over the last three years (measured by forward price-to-earnings ratios). It may all be too good to be true, but volatility is low, so it’s cheap to hedge risk exposure – the VIX is at a five-month low, and the crossover credit default swap is at its lowest level since the beginning of 2022. It’s turning out to be a reasonable year.

(Performance data/data sources: Refinitiv DataStream, Bloomberg, as of 16 May 2024, unless otherwise stated). Past performance should not be seen as a guide to future returns. 

Vidéo: Rischio di credito - Aggiornamento (Webinar)
Mercati La Parola a Tentori

Rischio di credito - Aggiornamento (Webinar)

  • A cura di Alessandro Tentori
  • 09 Luglio 2024 (15 min di lettura)
Investment Institute
Looking for some Glue
Mercati Viewpoint Chief Economist

Looking for some Glue

  • A cura di Gilles Moëc
  • 08 Luglio 2024 (10 min di lettura)
Investment Institute

    Disclaimer

    Prima dell’investimento in qualsiasi fondo gestito o promosso da AXA Investment Managers o dalle società ad essa affiliate, si prega di consultare il Prospetto e il Documento contenente le informazioni chiave per gli investitori (KID). Tali documenti, che descrivono anche i diritti degli investitori, possono essere consultati - per i fondi commercializzati in Italia - in qualsiasi momento, gratuitamente, sul sito internet www.axa-im.it e possono essere ottenuti gratuitamente, su richiesta, presso la sede di AXA Investment Managers. Il Prospetto è disponibile in lingua italiana e in lingua inglese. Il KID è disponibile nella lingua ufficiale locale del paese di distribuzione. Maggiori informazioni sulla politica dei reclami di AXA IM sono al seguente link: https://www.axa-im.it/avvertenze-legali/gestione-reclami. La sintesi dei diritti dell'investitore in inglese è disponibile sul sito web di AXA IM https://www.axa-im.com/important-information/summary-investor-rights.

    I contenuti pubblicati nel presente sito internet hanno finalità informativa e non vanno intesi come ricerca in materia di investimenti o analisi su strumenti finanziari ai sensi della Direttiva MiFID II (2014/65/UE), raccomandazione, offerta o sollecitazione all’acquisto, alla sottoscrizione o alla vendita di strumenti finanziari o alla partecipazione a strategie commerciali da parte di AXA Investment Managers o di società ad essa affiliate, né la raccomandazione di una specifica strategia d'investimento o una raccomandazione personalizzata all'acquisto o alla vendita di titoli. L’investimento in qualsiasi fondo gestito o promosso da AXA Investment Managers o dalle società ad essa affiliate è accettato soltanto se proveniente da investitori che siano in possesso dei requisiti richiesti ai sensi del prospetto informativo in vigore e della relativa documentazione di offerta.

    Il presente sito contiene informazioni parziali e le stime, le previsioni e i pareri qui espressi possono essere interpretati soggettivamente. Le informazioni fornite all’interno del presente sito non tengono conto degli obiettivi d’investimento individuali, della situazione finanziaria o di particolari bisogni del singolo utente. Qualsiasi opinione espressa nel presente sito internet non è una dichiarazione di fatto e non costituisce una consulenza di investimento. Le previsioni, le proiezioni o gli obiettivi sono solo indicativi e non sono garantiti in alcun modo. I rendimenti passati non sono indicativi di quelli futuri. Il valore degli investimenti e il reddito da essi derivante possono variare, sia in aumento che in diminuzione, e gli investitori potrebbero non recuperare l’importo originariamente investito.

    Ancorché AXA Investment Managers impieghi ogni ragionevole sforzo per far sì che le informazioni contenute nel presente sito internet siano aggiornate ed accurate alla data di pubblicazione, non viene rilasciata alcuna garanzia in ordine all’accuratezza, affidabilità o completezza delle informazioni ivi fornite. AXA Investment Managers declina espressamente ogni responsabilità in ordine ad eventuali perdite derivanti, direttamente od indirettamente, dall’utilizzo, in qualsiasi forma e per qualsiasi finalità, delle informazioni e dei dati presenti sul sito.

    AXA Investment Managers non è responsabile dell’accuratezza dei contenuti di altri siti internet eventualmente collegati a questo sito. L’esistenza di un collegamento ad un altro sito non implica approvazione da parte di AXA Investment Managers delle informazioni ivi fornite. Il contenuto del presente sito, ivi inclusi i dati, le informazioni, i grafici, i documenti, le immagini, i loghi e il nome del dominio, è di proprietà esclusiva di AXA Investment Managers e, salvo diversa specificazione, è coperto da copyright e protetto da ogni altra regolamentazione inerente alla proprietà intellettuale. In nessun caso è consentita la copia, riproduzione o diffusione delle informazioni contenute nel presente sito.  

    AXA Investment Managers può decidere di porre fine alle disposizioni adottate per la commercializzazione dei suoi organismi di investimento collettivo in conformità a quanto previsto dall'articolo 93 bis della direttiva 2009/65/CE.

    AXA Investment Managers si riserva il diritto di aggiornare o rivedere il contenuto del presente sito internet senza preavviso.

    A cura di AXA IM Paris – Sede Secondaria Italiana, Corso di Porta Romana, 68 - 20122 - Milano, sito internet www.axa-im.it.

    © 2024 AXA Investment Managers. Tutti i diritti riservati.