2024 is nicely on its approach and buyers are on the lookout for the proper funding to hold them all year long. Juan Nozal, mounted earnings portfolio supervisor at MAPFRE Asset Administration, thinks fixed-income securities might be the reply.

Patrick Brusnahan: How lengthy have you ever been at MAPFRE AM, and what’s your particular position there?

Juan Nozal: I joined the administration staff at MAPFRE AM 5 years in the past, particularly within the mounted earnings space, the place I’m answerable for managing investments for the life and non-life insurance coverage portfolios. Our space performs a variety of duties. For instance, we’re answerable for aligning investments with the corporate’s liabilities, and for managing the corporate’s personal funds. We’re additionally answerable for proposing new funding concepts for the broader community.”

Nonetheless, my particular position on the staff is targeted on a two-fold (and complementary) perform of analyst-manager inside the credit score market (company bonds). On one hand, I’m answerable for analyzing the solvencies and credit score profiles of the varied issuers, with the intention of evaluating and creating new funding alternatives. Every particular person on our staff is specialised in a single explicit asset class for the varied forms of fixed-income securities, and there’s then a extra detailed breakdown, into explicit industries or geographic areas. For instance, I’m answerable for the healthcare, expertise, and actual property sectors, amongst others. Alternatively, we’re answerable for monitoring and monitoring efficiency of the portfolios, and for making lively administration choices based mostly on a number of variables. These could also be variables that have an effect on the markets (financial coverage, rates of interest, macro indicators, and so on.), or they might be variables that replicate the wants of the Group’s numerous corporations.

What can we count on from mounted earnings in 2024?

Nicely, so as to clarify the context of the present market and our imaginative and prescient for the present yr, now we have to start by looking again. Lower than two years in the past we had been dwelling in a world of a lot decrease rates of interest, the place fixed-income securities weren’t a really enticing kind of asset for funding. In lots of instances yields had been damaging, so funding turned concentrated in equities, as a result of though they’ve a better threat element, they had been providing higher returns. In different phrases, investing in fixed-income securities wasn’t seen as a option to enhance portfolio worth, however as an alternative, they had been handled as a protected haven asset, to offer safety within the context of issues a couple of weakening financial system.”

Nonetheless, throughout the previous couple of years we’ve needed to confront quite a few challenges, such because the coronavirus pandemic, provide chain interruptions, and manufacturing bottlenecks. Then the battle between Russia and Ukraine broke out, which in flip led to an vitality disaster. All of these challenges ushered in an inflationary interval, which in flip has brought on the central banks to tighten their financial coverage in an unprecedented approach. All of this has had a powerful influence on mounted earnings.

At this time limit, our perception is that fixed-income property signify an impressive possibility, as a approach of dealing with inflation with out having to tackle particularly excessive ranges of threat. Just some years in the past, anybody who wished to make use of fixed-income securities for funding actually needed to rely on high-risk company bonds, however now, enticing yields may be discovered with out a lot threat. For instance, Spanish 10-year sovereign bonds have been providing yields of greater than 4% (now 3.2%), with their Italian equal up close to 5%, and with the German Bund at 3%. And in a scenario of inverted curves, shorter phrases have paid much more.”

What ought to we be preserving our eye on this yr if we wish to perceive the evolution of this asset class?

Nicely, the selections of the central banks with regard to their official rates of interest are clearly value watching, together with the messages they’re transmitting at their conferences. Many analysts expect 2024 to signify a change of cycle. The central banks are sending clear messages that we’re coming to the tip of a cycle of tighter financial coverage, however the precise timing of any adjustments stays unclear, as does the magnitude of any fee cuts they may resolve to make. What appears extra vital to me is the entire quantity of these fee cuts, quite than once they may start.

The macro knowledge are additionally changing into extra vital, with extra affect on the markets. A method of describing that is to say that the monetary markets are more and more knowledge dependent, and on some events, they’re reacting in an exaggerated approach when financial knowledge are launched. Finally, we have to know easy methods to benefit from all that volatility.

The upcoming elections are going to be one other issue to observe. Greater than 70 international locations might be going to the polls this yr, and through election years we are likely to see extra volatility. The American elections, which can most likely be probably the most carefully watched in addition to probably the most influential, will happen on November fifth this yr. And along with their political outcomes, nationwide elections also can enhance social tensions and even irritate geopolitical conflicts with neighbouring international locations.

Lastly, throughout 2024 public treasuries in addition to companies are more likely to have particularly intensive wants for financing. And that is the place buyers might be able to purchase at a premium based mostly on the curves current on the secondary market. Regardless that we’re just one month into this new yr, we’ve already seen excessive ranges of issuing by governments. One particularly related instance has been Spain’s traditionally massive issuance (€15bn) of 10-year syndicated bonds, which had been additionally bought at document numbers. One other instance was seen in Italy, which issued bonds in numerous tranches (7-year, 15-year, and a 30-year faucet).

What are your suggestions with regard to completely different threat profiles?

For conservative buyers, we’re recommending an particularly excessive proportion of sovereign debt from extra developed (semi-core) international locations akin to Belgium, and by way of personal mounted earnings, we’re suggesting high-quality (single A) company bonds. So far as phrases, I might deal with shorter one to a few yr tranches, which in view of the inverted curves, proceed to supply superb yields, generally greater than 3%, and that is despite the rally we’ve seen lately by bonds with even shorter phrases. When it comes to industries, I might prioritize probably the most defensive, akin to healthcare, shopper retail, and telecom. These are all industries with secure revenues and the power to set costs, which supplies them extra constant revenue ranges throughout troublesome occasions.

For buyers with a average threat profile, I might deal with peripheral international locations akin to Spain and Portugal, and even Italy, which not solely supply increased yields, however that are additionally experiencing higher progress in comparison with different eurozone economies like these of France and Germany. We’re additionally specializing in investment-grade (IG) bonds, which are typically higher protected towards situations of financial deceleration in comparison with high-yield (HY) bonds. We’re taking tactical positions in additional cyclical sectors, which frequently do higher beneath circumstances of unfold compression. We additionally suppose that if rates of interest go down, this might generate alternatives in different sectors akin to expertise and actual property.

Lastly, for probably the most risk-tolerant buyers, we would come with a portion of high-quality HY bonds with a median ranking of BB or BB+. Nonetheless, we’d additionally choose these corporations very fastidiously. And by way of asset varieties, we’d are likely to favor monetary subordinated debt.

If we glance particularly at investment-grade bonds in euros, what do you see because the best-case situation for that section?

When it comes to the efficiency of corporations issuing investment-grade bonds, one of many best-case situations can be a delicate touchdown for the financial system, which is actually what I feel we’re going to see. This will even imply sluggish progress, so long as it’s ample to permit company income to extend on the similar tempo. It additionally signifies that inflation will proceed to be reined in, to permit for looser financial coverage. In flip, these decrease rates of interest will assist drive the stream of capital in direction of personal mounted earnings.

Typically, the businesses chosen ought to have strong fundamentals, with good web leveraging ranges, in a situation the place many corporations are in a position to profit from the decrease financing prices that had been accessible previous to the current rate of interest hikes.

When it comes to IG bonds in euros, the spreads are now not what they had been only a few months in the past (in some instances it’s even debatable whether or not they might be underpriced), however their total yields stay enticing, and their coupon accrual may be very attention-grabbing too. Nonetheless, despite these interesting valuations, not every thing is an efficient possibility. That is why we desire to deal with IG and corporations characterised by wholesome stability sheets, primarily natural progress, and money flows ample to handle complicated conditions.

Though the outlook for fixed-income securities appears usually constructive, what are among the dangers we must also be contemplating?

Nicely, one threat can be {that a} important drop in financial exercise might happen and result in a recession. If that happens, sovereign bonds are likely to carry out nicely due to their extra defensive nature, whereas personal bonds typically carry out extra poorly, as a result of company income might lower, together with spreads.”

In distinction, sudden financial progress could make central banks unsure about whether or not to calm down their financial coverage, whereas additionally making a threat of renewed inflation. Lastly, an increase in geopolitical conflicts also can current a threat. Though it may appear counterintuitive, sovereign bonds may produce higher outcomes in periods of geopolitical threat, in comparison with company bonds. Nonetheless, any of these situations would have a really damaging influence on worldwide monetary markets, by rising volatility, threat premiums, and costs for petroleum and different uncooked supplies, which might in flip have an effect on progress.

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