Let’s face it, Maltese investors are in line with the Italians when it comes to selecting a particular asset class. In fact, the local investor is more focused on asset classes, which mainly generate an income return and thus tend to shy away from capital growth investments such as equities. Interestingly enough, over 75 per cent of Italians are more focused towards generating income from their investments.
Should local investors remain solely focused on the fixed-income asset class at the current low yielding environment? In my view, as I have opined in previous writings, the current low yielding environment is posing risks to those investors who opted in taking more risk in order to beef-up their income return. In fact, nowadays even very conservative investors have opted for such move.
In my view, as I have opined in previous writings, the current low yielding environment is posing risks to those investors who opted in taking more risk in order to beef-up their income return. In fact, nowadays even very conservative investors have opted for such move. In
In Europe the wave of quantitative easing (QE) by the European Central Bank (ECB), has pushed yields towards record lows, and it is the winding down of such QE that will possibly trigger a sell-off primarily in sovereign debt.
By now, local investors should have learned the lesson that the easy gains being generated from local government bonds is over. In this regard, being exposed primarily to long-dated government bonds is detrimental towards capital preservation. Case in point was the last quarter of 2016, whereby we have experienced a remarkable sell-off of over 14 per cent in the said bonds.
In my view the recent price appreciation in government bonds is a short-term proposition and is mainly based on the fact that the ECB in its last meeting tended to set a dovish tone, despite their acknowledgement that economic growth prospects now seem broadly balanced. It is imperative to note that their assessment is also based on the fact that core inflation, a measure of inflation that excludes energy prices and food, which tend to be more volatile, was lower at 0.9 per cent in May from the previous levels of 1.2 per cent in April.
Thus, despite the fact that over the coming months we might experience further appreciation in bond prices across all the asset class, over the longer term inflationary pressure should trigger a re-pricing across the asset class, with the most vulnerable being government bonds and investment grade issues. Likewise, more risky debt should also be impacted; however, the high coupon mechanics should limit the downside risk. The latter argument is the difference in market interpretation from the theoretical perspective.
When considering the current situation, I believe it is imperative that local investors opt to exit their comfort zone strategies and move more into balanced approaches that combine an allocation to both fixed income and equities. In my view, going forward an equity element is crucial in generating returns from a portfolio. I can’t see remarkable price appreciations from the fixed-income asset class, apart from the carry trade. On the contrary, equities mainly in Europe have room for gains.
To conclude, the comfort zone of investors now should be re-aligned to a more balanced asset class and this is possible by allocating funds to multi-asset strategies. In such strategies a fund manager will balance the portfolio towards more attractive venues, mainly between bonds and equities, which he believes will trigger the necessary performance. Just to give you readers an idea of the current situation, on average year-to-date multi-asset strategies returned just over 6 per cent, whereas solely investment grade fixed income strategies registered a 0.82 percent on a year-to-date basis.
Disclaimer:
This article was issued by Jordan Portelli, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.