The Column – Market Insights
A new year begins and market participants, customers and investors are looking for investment ideas; they try to “predict” what could happen in the next twelve months on stock exchanges, rates, currencies and raw materials.
On how economic and geopolitical events may or may not influence the hypothesized market framework. It has been amply demonstrated as this exercise is extremely difficultthat some new element always arrives that none of the thousands of human minds working in the field had even hypothesized.
Despite this necessary premise, let’s 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 and where we don’t think we can bring much added value), but of 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 2026? 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 3 side ideas bonds and currencies.
➢ Emerging local currency debt through supranational securities: we believe that some countries offer rather interesting real returns (i.e. net of inflation) on bonds (this is the case of Brazil, other Latin American countries, India, South Africa to name a few) and well above those of developed countries. Real returns among the highest of the last decade in many cases as you can see from the MRB Partners graph.
We believe it is better to expose ourselves through AAA supranational securities such as IBRD, EBRD, IFC, EIB, Asia Development Bank, denominated in the desired local currency, in order to avoid any credit risk linked to the issuer. 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 take is to choose only currencies that are theoretically undervalued based on purchasing power parity calculations or similar. Here the Brazilian Real, South African Rand, Turkish Lira, Korean Won, Indian Rupee excel, while for example the Mexican Peso or Eastern European currencies are less convenient. And in general, as you can see from the Deutsche Bank chart, the dollar’s almost 15-year bullish trend against emerging currencies appears to be about to reverse.
Combining the two dimensions our basket for 2026 is made up of Brazil + South Africa + India with equal weight. In Brazil we recommend choosing a medium/long term bond given that there is a good chance of seeing rate reductions in the coming quarters after the central bank brought them to record levels (15%) especially for political/fiscal reasons. On South Africa a short-term bond. On India, given the strong correlation of the Rupee with the trend of the US Dollar (on which we do not have a positive view), we recommend a fund that invests in bonds in local currency but which is hedged at the USD/Euro exchange rate level (HSBC, for example, has a product with these characteristics). Alternatively use L&G ETFs.
➢ English government debt hedged: we think that in the United Kingdom, due to above-normal inflation and an unfavorable deficit and debt situation, i rates have remained quite highespecially when compared to the EU27 world, to which until a few years ago the UK also belonged. Gilts (this is the equivalent name of our BTPs) offer an average yield close to 4.5% (on the average duration of 8 as shown in the FT graph) and we think they can offer good satisfaction during 2026.
We prefer not to expose ourselves to the British Pound and therefore we use a product that is hedged exchange side (with a small cost already incorporated into the product) such as Vanguard or Ishares ETFs for example.
If, as we believe, inflation returns and the country’s medium/low growth continues, the Bank of England will cut rates in the coming months to the full advantage of the price of the securities included in the ETFs which have a rather high average duration (8 as mentioned) and therefore react well to rate cuts.
➢ Norwegian government bonds: in your opinion, is it possible that a very rich country, which has been accumulating budget surpluses for decades (thanks to oil), in which there is a sustainable and anti-waste culture, which has a debt/GDP level just above 50%, offers attractive rates (almost 4% for short government maturities), is well governed, with one of the largest sovereign wealth funds in the world, has had a weak currency for a decade now?
Well yes, the Norwegian Krone is in this strange situation of weakness (it has lost 30% of its value against the Euro since 2015 and is undervalued by approximately 35% according to classic valuation parameters (see Deutsche Banks chart). It is true that the country is small, the bond market is also small and the turnover that is exchanged on the currency on the foreign exchange market every day is rather limited, but the situation still seems paradoxical to us. Today, when we are looking for safe assets, issued by solid issuers and not involved in complex geopolitical issues, to reduce what is held for example in American Treasuries, NOK bonds would be an excellent candidate. So why not buy them?
It’s quite simple to expose yourself to the topic, just buy a Norwegian government bond expressed in crowns. There are a dozen on the market with maturities ranging from a few months to over 15 years. The choice is yours, we prefer short deadlines.
See you in the next episode of our column for some stock and raw material ideas for Panorama readers.
