Markets moved into a risk-off mode as a result of the ongoing geopolitical turmoil that culminated in Russia’s assault and invasion of Ukraine. This resulted in an open conflict between the two countries, followed by historic and record levels of sanctions implemented by most of the developed countries, with the US, EU and UK leading the charge. The consequence has been a strong increase in volatility and sharp negative performance in fixed income risk assets with Emerging debt leading the way. High Yield and investment grade markets also suffered substantially, though EUR assets outperformed USD and defensive sectors, such as telecoms and health care, did well. Eurozone sovereigns outperformed their dollar counterparts, notably core EMU & Sweden, while on peripherals, the Italian govies performed well. Commodity markets were clearly the biggest winners of the month, while Eastern European currencies and of course the Ruble suffered the most.
The deadlock in Ukraine and the failed negotiations so far indicate that the war and resulting human casualties are likely to continue to weigh on sentiment. The resulting volatility and price fluctuations will continue to impact fixed income markets in the short term, making flexible and tactical management essential. Over the course of the year, the slightly longer term implications will obviously involve ever-rising inflation, which risks becoming out of control on the back of increasing commodity prices and greater supply chain constraints. It is also possible that this has an impact on consumption and growth at large across developed and emerging nations. Central banks, in their quest to control inflation, have not fully changed tack and continue to persevere in their hawkish stance. We still expect the Fed to increase its rates (by 25 bps instead of the previously expected 50 bps), an we continue to believe that the ECB could hike rates this year, though much later in 2022. It remains to be seen how markets/economies react to these tightening policies in the absence of fiscal support and in the context of the ongoing geopolitical issues. However, we do believe that developed countries are likely to announce an additional fiscal stimulus (through increasing debt), which is likely to deliver some positive effects and could provide a platform for further monetary tightening.
Strategy & Positioning
It is important to note that Candriam Global Bond and Credit strategies have no exposure to Russian Sovereign debt. Russia has been excluded from our sovereign investment universe based on sustainability characteristics.
Eurozone (from -2 to +2) |
|||
|
Sovereign Bonds |
Grade |
Change |
Rationale |
|
EU Duration |
0 |
▲ |
As the conflict outcome remains uncertain and given the risk to European growth, ECB’s hawkish stance is likely to be challenged by the macroeconomic outlook. |
|
Core Countries |
|||
|
Germany |
-1 |
▲ |
In this context, German rates, which also benefit from their safe haven status, should evolve in a trading range. We therefore actively monitor our duration exposure. |
|
France |
-0.5 |
▲ |
Reduce our short positions in France on the back of reduced political uncertainty as President Macron is leading comfortably in the polls. |
|
Belgium |
0 |
► |
|
|
The Netherlands |
0 |
► |
|
|
Austria |
0 |
► |
|
|
Non-Core Countries |
|
|
Some profit taking is warranted in the context of the recent widening that has been witnessed. The potential new EU fiscal plan in response to the economic fallout of the conflict could also support peripherals. |
|
Italy |
0 |
► |
|
|
Spain |
0 |
▲ |
We have notably reduced our short position on Spain. |
|
Ireland |
0 |
► |
|
|
Portugal |
0 |
► |
|
|
Non-EMU Countries |
|||
|
UK |
0 |
▼ |
|
|
Norway |
0.5 |
► |
Long Norway vs Sweden - Norges Bank hikes are already fully priced while maintaining a strong focus on housing market. |
|
Sweden |
-0.5 |
► |
At the same time, Riskbank expects inflation to fall back below target in the medium term. |
|
EU Linkers |
1 |
▲ |
The absolute level of EU Breakevens is high, but the asset class is a good hedge against the inflation risks coming from the rise in commodity prices and worsening tensions between Ukraine and Russia. We expect higher levels of inflation, making it an interesting asset class. |
|
Investment Grade |
0 |
▲ |
Valuation is increasingly attractive on the European market following the sharp repricing that has taken place over the past two months. However, as the Ukraine/Russia conflict outcomes are binary and the European economy is vulnerable, we are waiting for a positive catalyst. Furthermore, we expect the fundamentals to be negatively affected by the rise in inflation and sanctions against Russia. However, this could be potentially offset by strong fiscal support. |
|
EMU Non-Financial |
0 |
▲ |
|
|
EMU Financial |
0 |
► |
|
|
EMU Covered |
-0.5 |
► |
|
|
High Yield |
0 |
▲ |
Valuation is increasingly more attractive on BB segment following sharp repricing but B & CCC rated issuers remain expensive in the current context. As the conflict outcome is binary and the European economy is currently vulnerable to the Russia/Ukraine situation, we are awaiting a positive catalyst while maintaining a neutral stance. |
|
Euro Convertibles |
0 |
► |
Increased visibility on the outcome of the war on the economy is required prior to re-entering the market. |
United States (from-2 to +2) |
|||
|
Sovereign Bonds |
Grade |
Change |
Rationale |
|
US Treasuries |
0 |
▲ |
Overall, the inflation cycle is still strong while unemployment is moving lower. While Fed is preparing for a lift-off in rates in March (by 25 bps), Treasuries seem capped by their safe haven status as the US economy has so far been relatively immune to the Ukraine/Russia conflict. |
|
Australia |
-1 |
► |
Short AU vs NZ - While the RBA were relatively dovish vs other CBs, the current data (supported by the re-opening of the economy) could push it to move towards a more hawkish direction. In Australia, we have seen strong numbers in employment and inflation. |
|
New Zealand |
-0.5 |
► |
New Zealand rates seem priced to perfection. |
|
Inflation Linked Bonds |
|||
|
US Breakeven |
0 |
► |
|
|
Corporate Bonds |
|||
| Investment Grade | 0 |
▲ |
US credit valuation is reasonably adjusting but at a slower pace than its European peers. The geopolitical situation and volatility in rates are a hindrance. |
|
Non-Financial |
0 |
▲ |
|
|
Financial |
0 |
► |
|
|
High Yield |
0 |
▲ |
US High Yield segment has generally resisted but the geopolitical situation adds yet another risk to global economy. |
|
Emerging Bonds |
|||
|
Emerging Govt HC |
0 |
► |
|
|
Emerging Govt LC |
0 |
► |
|
|
China |
0.5 |
► |
Chinese policymakers have stepped up efforts to support the economy |
|
Emerging CorpDebt |
0 |
► |
|
Developed currencies vs. Euro (from -2 to +2) |
|||
|
Currency |
Grade |
Change |
Rationale |
|
US Dollar |
-1 |
► |
|
|
Japanese Yen |
0 |
► |
|
|
British Pound |
0 |
► |
|
|
Swiss Franc |
0 |
► |
|
|
Australian Dollar |
0.5 |
► |
Long commodities currency |
|
New Zealand Dollar |
0.5 |
► |
Long commodities currency |
|
Swedish Krone |
0 |
► |
|
|
Norwegian Krone |
0 |
► |
|