A new year begins and market participants, customers and investors are looking for investment ideas; they try to “predict” what may happen in the next 12 months on stock exchanges, rates and currencies.
It has been widely demonstrated that this exercise is extremely difficult and often unforeseen events upset the market picture at the beginning of the year.
Nonetheless, we try to give some advice that deliberately does not concern the part core of the portfolio (where the suggestions of asset allocation are found in abundance), but ideas that we will define as “satellite”, more specific, perhaps less consensus, which can help to find something alternative, to stimulate the intellect of our readers.
So what do we like about the markets with a view to 2025? What do we believe “value” contains? Since this is the perspective we follow most when analyzing the markets. Today we’re talking to you about 2 side ideas bonds.
- Emerging local currency debt through supranational securities: we believe that some countries offer rather interesting real returns (i.e. net of existing inflation) on bonds (this is the case of Brazil and other Latin American countries, Indonesia and prospectively Turkey) and well above those of the countries developed, as you can see from the JPM Asset Management chart. Real returns among the highest of the last decade in many cases.
We believe it is better to expose ourselves through AAA supranational securities such as IBRD, EBRD, IFC, EIB, World Bank, denominated in the desired local currency and with a maximum maturity of a couple of years, in order to avoid any credit risk linked to the issuer and to reduce much the risks regarding interest rate movements. There is also an advantage at a tax level.
The second element to consider is the currency trend, often the least predictable and the most volatile. The approach we follow is to only choose currencies that are theoretically undervalued based on purchasing power parity calculations or similar ones like the one Alpine Macro offers you for example.
Here the Turkish Lira, Brazilian Real and South African Rand excel, while for example the Mexican Peso appears to be very overvalued.
So by combining the two dimensions, our mix for 2025 is Brazil + Turkey + Indonesia (which we prefer to South Africa as it is less correlated as a currency and better placed in terms of economic and growth dynamics).
- Short-term government debt of developed countries characterized by central banks hawkish: this untranslatable Anglophone term means central banks that plan to increase official interest rates or in any case (and this is the current case) are reluctant to lower them. This situation today creates two elements: on the one hand i bonds of these countries yield more, on the other hand the currencies are theoretically “supported” in the sense that the positive rate delta is in their favor (for example compared to the countries of the Eurozone).
The first element is well highlighted by the graph developed through Bloomberg which shows the rate curves of three countries that find themselves in this situation (from above the United Kingdom, Norway and Australia) and the comparison with the rate curves of Germany and Italy which shows the greater return obtained (on average two percentage points on short maturities of 1 – 2 years).
The currency element is in this case seen with a view to seeing these three currencies (Pound, Krone and Australian Dollar) not lose ground against the Euro in 2025. They will undoubtedly fluctuate, but the ultimate goal is not to gain there. The three currencies combine well as they are quite decorrelated with each other and for this reason we have chosen them: a “portfolio” with the three currencies together will be less volatile. Here, talking about three solid countries, it is possible to use government bonds that normally yield slightly more than AAA supranationals.
See you in the next episode of our column for a couple of ideas on the equity side for our readers