By Eric Vanraes and Pascal Perrone
In November, European government bond yields fell to all-time lows fuelled by speculation that the European Central Bank (ECB) will extend its asset purchases to sovereign debt. In addition, as OPEC (Organisiation of the Petroleum Exporting Countries) members kept their output target unchanged, oil prices dropped to their lowest levels in over two years. European business indicators rose thanks to more positive trends in economic data (with the exception of Italy). Consumption data were also better, new car sales in particular. The ECB confirmed its intention to increase the size of its balance sheet to EUR 3 trillion and has already started to buy ABS. Deflation fears have continued to increase and Mr Draghi said: “we will do what we must to raise inflation and inflation expectations, as fast as possible, as our price stability mandate requires”.
In the US, economic data continued to deliver a mixed picture: yoy GDP growth was revised from 3.5% to 3.9% as a result of a significant acceleration in consumer spending while Thanksgiving sales (“black Friday”) showed an alarming -11% decrease, provoking fears of a weak start to the holiday season. Several Federal Reserve (Fed) members were concerned about a possible decrease in inflation expectations. Despite strong earnings published by US corporates, economic growth remained unclear and has led the Fed to publish a mixed outlook further to the conclusion of its latest statement:
“If incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated”.
Increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated.
The 2y German yield increased from -0.06% to -0.03% (+3bps) whilst the 5y decreased from 0.13% to 0.11% (-2bps) and the 10y from 0.84% to 0.70% (-14 bps). On the Credit side, the US corporate CDX Index did not move significantly, from 64 to 62 bps while the European iTraxx main Index dropped from 65 bps to 58 bps as European corporates could be included in the ECB asset purchases program.
Assets increased further during the month from EUR 105.1 to 108.8 million. The Fund has been active in four new deals in the primary market: Shell, Bayer, SAP and GlaxoSmithkline. Positions in Telekom Austria, Nederlandse Gasunie and Hutchison Whampoa were increased while Philip Morris was sold in order to remove exposure to the tobacco sector. At month end, the Fund held 48 issues and 47 issuers.
The duration overlay policy was active in November. Corporate bond trades increased the modified duration of the portfolio from 5.3 to 5.7 and at the same time, the Investment Adviser decreased the modified duration of the Fund from 3.1 to 2.6. Consequently, the short Bund position has been increased from 190 to 280 contracts.
European economic forecasts are still expected to be cut further and the ECB will accelerate its very accommodating monetary policy due to increasing deflation and recession risks. Nevertheless, the Investment Adviser will adopt a more cautious stance and will continue to decrease the duration risk of the Fund before year end. On the credit side, corporate bond selection will be driven by valuation opportunities in both primary and secondary markets. As a consequence, positive returns will be achievable through the carry of corporates, their spread tightening potential, credit selection and active management of duration and yield curve.
Commentary provided by Banque Eric Sturdza in their capacity as Investment Adviser to the Fund as of 12 December 2014