- The current price of oil remains a problem for many producers and is pushing commodity-reliant countries to devalue their currencies.
- AXA IM favours nominal bonds over inflation-linked bonds
- The Fed’s indecisiveness combined with a stabilising euro is making positions in the Eurozone look increasingly attractive.
Even though the rapid decline in oil prices is coming to an end, for many oil producers -like those in the shale market in the US and offshore oil fields-, the current oil price is a problem. According to Chris Iggo, CIO Fixed Income Europe and Asia at AXA Investment Managers, “lower prices are pushing commodity-reliant countries to devalue their currencies and Saudi Arabia recently announced that the current oil price has forced them to sell some foreign investments to cover a fund deficit.”
Nick Hayes, manager of the AXA WF Global Strategic Bonds, believes that“The declining oil price has also impacted high yield markets… We favour nominal bonds over inflation-linked bonds given the outlook for inflation. The main concern for us now is where oil prices will settle, and it’s important for fixed income investors to lower their expectations of inflation given the chance that falling commodity prices will continue to impact the level of inflation.”
During the last year, the managers have been decreasing the amount of high yield and emerging market debt exposure and they believe that we will see a rise in government bond yields once the current risk-off environment subsides. “A bear market in credit has created opportunities for us – especially with the increase in the number of negative credit ‘events’ which means we can increase credit allocations at higher spreads and yields,” says Hayes.
In regards to the Federal Reserve’s (Fed) policy, they believe that “the US economy will continue to prosper, which will periodically get people excited about the potential for a rate hike, but the global economic environment is likely to stay weak. The domestic US labour market is still very tight, but wages are picking up, as they are in the UK. However, higher wages don’t immediately translate into inflation. Core inflation has so far stayed low, removing oil from the calculation. It’s difficult to have a view on 1-2 year inflation figures, but central banks will continue to set rates to reach inflation targets. What I would like to see is the Fed being more decisive - raise the rates and be confident about the state of the US economy.” Considering this, Hayes prefers the Eurozone over US interest rate risk. “Given attractive valuations, we have increased our allocation to investment grade corporate bonds, which has started to offer interesting yield levels for high quality credit, ” he comments.
AXA Investment Managers is a global asset management company combining rigorous risk monitoring with expertise across multiple asset classes to help clients meet their financial needs. With approximately €694 billion in assets under management as of the end of June 2015, AXA IM employs over 2,300 people around the world and operates out of 28 offices in 21 countries. AXA IM is part of the AXA Group, a global leader in financial protection and wealth management.