Amaury D’orsay
The strength in the US economy, so far, keeps us confident that the Fed will not begin policy cuts before May-end, and the ECB would also remain vigilant on disinflation, says Amaury D’orsay, Head of Fixed Income at Amundi, Europe’s largest investment manager.
He adds “Sluggish growth expectations going forward mean the emphasis on quality credit and valuations, for instance in Europe, will increase. Growth concerns in Europe persist as forward looking indicators are coming in weak.
“But on inflation there are risks from the Middle East as shipping costs (goods) from Asia to Europe increase. We are monitoring these risks and for how long they last and stay a bit defensive on duration tactically, although we are agile in adjusting this stance.
“Corporate credit presents opportunities but in High Yield risk/reward is sub-optimal, leading us to be defensive on this segment, particularly low-rated areas such as B- and CCs. However, on Investment Grade where valuations are decent from a historical perspective, we prefer BBB which are a sweet spot of quality and return.
“We also like medium-term maturities and the banking sector. In addition, investors may consider the primary market for attractive high-quality names, as was the case in January.
“We maintain our view on Fed rate cuts but this relies on inflation coming down and economic activity slowing. Thus, we stay mildly constructive and recognise the need to be active in an election year with any potential fiscal push (not our main scenario).
“Importantly, if the economy stays strong, rates are unlikely to come down significantly. At the same time, we focus on agency MBS which offers an additional income and its valuations are also fair relative to history. Another segment where we see value is Investment Grade, where we favour financials over non-financials but believe investors need to be selective with issuer exposures.
“There are also opportunities in new issues, provided there is enough compensation for taking on liquidity and credit risks. However, we are mindful of rate volatility in Hgh Yield and assessing how cyclical sectors could be affected as the economy slows.
“We keep a positive stance on EM debt. But geopolitical risks in the Middle East and Ukraine, along with US inflation surprise and idiosyncratic risks, could create surprises. For instance, we believe China stimulus is unlikely to be a game-changer in the long term and the unconventional monetary policy in Turkey cannot be sustained.
“We like Emerging Market HC and corporate debt but favour High Yield over Investment Grage, given better valuations. In LC, we favour LatAm, and are selective in Asia. FX.
“USD could see some near-term strength amid geopolitical risks and market movements, making us slightly positive. In EM, we are positive on LatAm FX and INR but are vigilant on MXN, given upcoming elections that could cause volatility, “ notes D’orsay.
