Strategy

Bonds: To Be Or Not To Be? – Natixis IM

Amanda Cheesley Deputy Editor April 23, 2024

Bonds: To Be Or Not To Be? – Natixis IM

Natixis Investment Managers recently held a Thought Leadership Summit in Paris, with its affiliates participating, to discuss the global macroeconomic outlook as well as a range of asset classes and investment opportunities in 2024.

Phillippe Berthelot, CIO credit and money markets at Ostrum Asset Management, said in Paris at the Natixis Investment Managers summit that 2024 would be another good year for fixed income. “But it will probably not be as good as last year,” he added.

Berthelot said that bonds are his favorite asset class. In particular, he favors European investment grade credit this year, as it offers good returns and is a bit cheaper than US investment grade credit.

Other wealth managers also favor bonds in 2024. See more commentary here and here.

However, Mabrouk Chetouane, head of global market strategy, Natixis IM Solutions, was at odds with this in Paris, saying that it is too soon to say whether 2024 will be the year of the bond. 

François Collet, deputy CIO, DNCA, was also not convinced that 2024 would continue to be another positive year for bonds. “It’s going to be very challenging to outperform money markets,” he said.

Chetouane highlighted that the US economy is still strong and growth is expected to be above the potential this year. He expects growth of 2 per cent, arguing that the labor market is still in good shape and inflation is no longer an issue.

Chetouane believes that there could still be interest rate cuts in June or July in the US. Inflation pressure is also declining in Europe, he added, although core inflation is under pressure. “This is challenging for the European Central Bank (ECB) to cut rates. The EU economy is also stabilizing so it’s hard to justify rate cuts when core inflation is under pressure,” he told this news service.

Is 2024 the year of the bond? “Not immediately,” Chetouane said. “We need to wait for the green light of central banks, especially the US Federal Reserve. If the Fed postpones the first rate cut, and there is only one rate cut this year, this could negatively impact the bond market,” he continued. “The bond market is still volatile, and nervous investors are still wondering if there will be a rate cut in June.” He believes that now is not the moment to add duration to investors portfolios. “We don’t want to add duration in the bond market. We have to wait for the second half of the year to see if we add duration,” he said.

Equities
“We want to add equities to investors portfolios,” Chetouane continued. He believes that the momentum behind equities at the start of the year is still there. He has decided to maintain his firm's exposure to equities or reinforce it in some portfolios. “We like US and Japanese equities, in particular. We increased our exposure last year to Japanese equities and are still exposed. The performance of the Japanese stock market has been good,” Chetouane said.

Other wealth managers, such as BNY Wealth Management and Swiss private banks Union Bancaire Privée and Julius Baer, are also positive about Japanese equities in 2024. German asset manager DWS' top pick for Asia is Japan, both from a valuation perspective and in terms of earnings' growth. The firm believes that Japanese equities are a good way of benefiting from China's growth opportunities. See more commentary here

“We also like the Indian market. We do like growth and it is strong in India,” Chetouane said. The real estate crisis is meanwhile having a negative impact on the Chinese economy. “We haven’t increased our exposure to Chinese equities but we like Indian and Mexican equities and we also like the tech sector.” 

Shishir Baijal, chairman and managing director of Knight Frank India, also thinks that India is an attractive investment destination for global and domestic investors, owing to its robust domestic consumption, long-term economic stability, and extensive infrastructural development. See more commentary here. 

ESG
Meanwhile, with investors increasingly wanting to help tackle issues like climate change, Berthelot highlighted in Paris how ESG-focused investment is an impressive phenomenon that has been growing in Europe, but it has been fading slightly in the US.

This was echoed in Paris by Andrea DiCenso, portfolio manager and strategist, Loomis Sayles & Co, who manages funds covered by Article 8 of the EU’s Sustainable Finance Disclosure Regulation (which is currently being reviewed). “ESG-focused investments have fallen in popularity in the US, with not much green bond issuance in the US,” she said.

Hervé Guez, CIO, head of equities and fixed income, Mirova, also highlighted how ESG-focused funds have underperformed in the last two years and that needs to be addressed this year. He was not alone in his views. Léa Dunand-Chatellet, head of responsible investment and portfolio manager, DNCA, said that ESG-focused funds outperformed in 2020 but with geopolitical factors such as the Ukraine war and the energy crisis, there was a strong counter effect in 2022 and 2023.

Nevertheless, with investors increasingly wanting to have an impact to help transform society, Guez believes that ESG-focused investments will do well in the longer term, and highlighted the importance of having standardized good quality data to support it.

Ostrum also factors ESG criteria into their investment decisions, by excluding for instance coal and tobacco.

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