Global Short Duration strategy Summer rally continues
- 17 September 2020 (5 min read)
Key points
- Credit spreads further tightened thanks to a sustained level of monetary and fiscal support
- Europe is starting to see a second wave of coronavirus
- We kept the risk profile stable
What’s happening?
Despite persistent worries about spikes in infections across the world, credit spreads continued to tighten in August thanks to a sustained level of monetary and fiscal support from central banks and governments worldwide, China and the US re-committing to their ‘Phase One’ trade agreement, and encouraging news about a coronavirus treatment.
In a significant change in monetary policy, the US Federal Reserve (Fed) announced plans to shift to ‘average inflation targeting’ in an attempt to increase inflation expectations. This also implied that interest rates would likely remain at a low level for longer.
Following the continued risk-on environment and the Fed’s new inflation policy, US treasury, German bund
and UK gilt yields rose in August.
Portfolio positioning and performance
Sovereign: Despite the recent rally, we remained invested in short-dated US treasury inflation-linked bonds due to still attractive valuations.
Investment Grade: We kept our exposure to investment grade constant during the month. We were still active in secondary markets, buying for example US food company Bunge in US dollars.
High Yield and Emerging Markets: We also kept our exposure to high yield and emerging markets constant. We were still active in primary markets, participating in several emerging market new issues. Due to the gradual re-risking undertaken since late March, we now have a 34% allocation to high yield and emerging markets - upfrom 19% at the end of February. As such, we remain slightly overweight versus our long-term neutral allocation of 30%.
Outlook
Despite all advanced economies forecast to be in recession this year, we have now experienced the shortest bear market ever in credit markets due to the unprecedented monetary, fiscal and regulatory support.
We plan to keep on adding to attractive opportunities in European high yield (lagged the rally) and emerging markets (benefit from the Chinese recovery, a weaker dollar and lower for longer US yields) through primary markets as policy support still provides a strong backstop for credit markets despite more expensive valuations.
No assurance can be given that the Global Short Duration strategy will be successful. Investors can lose some or all of their capital invested. The Global Short Duration strategy is subject to risks including credit risk, liquidity risk and interest rate risk and counterparty risk. The strategy is also subject to derivatives and leverage, emerging markets and global investment risks.
Not for Retail distribution
This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly.
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.
All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document. Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.
Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales, No: 01431068. Registered Office: 22 Bishopsgate, London, EC2N 4BQ. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.