Manager Insight

Fixed-income team is also bearish on "commodity currencies."
By Michael Leonard | 15/01/15

Pascal Dubreuil, a senior fixed-income manager at London-based Amundi Group, thinks there's an opportunity to exploit attempts to kick-start the sluggish European economy.

About the Author
Michael Leonard, CFA, is chief equity strategist at Morningstar Canada. He holds a Bachelor of Commerce degree from Queen's University. He can be reached at michael.leonard@morningstar.com but cannot provide individual advice.

He says the European Central Bank "has to stay accommodative" due to lagging economic performance and the fear of deflation. The ECB wants to strengthen its balance sheet, he says, by buying assets including euro-denominated bonds in the coming months.

In response, Dubreuil and his colleagues are overweight in European government and corporate securities versus their benchmark, particularly in Italy, Portugal and France. Because of Amundi's expectations that European interest rates will remain relatively low, the team's European holdings have a much longer duration than its U.S holdings.

Consistent with the reflating theme in continental Europe, the fund has an underweight in the euro relative to the British pound and the U.S. dollar. This is based on Amundi's expectation that the euro will continue to erode in relation to some other major currencies.

On the plus side, euro depreciation will help improve the competitiveness of the Eurozone economy and favour exports. While Dubreuil is not incorporating into his outlook a specific forecast for the price of oil, he believes that cheaper oil will be beneficial to the European economy.

Dubreuil is the senior manager responsible for Amundi's global aggregate strategy, and is supported by co-managers Laurent Crosnier and Romain Mercier. The trio can draw on the expertise of approximately 130 strategists, credit analysts, quantitative researchers and socially responsible investing (SRI) analysts.

Benchmarked against the Barclays Global Aggregate Hedged Index, the strategy is available in Canada through NEI Global Total Return Bond , sponsored by NEI Investments.

With the employment picture continuing to improve in the United States, there's a good probability that the U.S. Federal Reserve will raise interest rates in the second part of this year, Dubreuil says.

Based on this top-down view, Amundi has an underweight in short-term U.S. bonds relative to the market benchmark for its global aggregate fixed-income strategy. And sticking with the theme of overall strength in the U.S. relative to other regions, the strategy favours the U.S. dollar over the euro and so-called "commodity currencies." Among the latter is the Canadian dollar, which has slumped in response to plunging oil prices.

Amundi expects the Chinese economy to continue to cool down relative to its recent history. Growth will remain positive, the fixed-income team believes, but at a lower rate than in previous years. This view contributes to their expectations of continued weakness in the currencies of Canada, Australia and New Zealand, since the commodities so critical to these resources-heavy economies could see less demand from China, one of their biggest global customers.

As for Japan, the Amundi team believes pro-active steps will be taken to fire up the Japanese economy. If anything, so-called "Abenomics" will only intensify. This was seen on Dec. 27 when the Japanese government approved its latest stimulus package, a 3.5-trillion-yen (C$33- billion) package of subsidies aimed at stimulating growth.

Consequently, with the expectation that these measures will eventually lead to inflation in Japan if successfully implemented, the fund has an underweight in Japanese government bonds and the yen, relative to the benchmark. "Abe will continue to weaken the yen," says Dubreuil, referring to the policies of the government led by prime minister Shinzo Abe.

The NEI fund takes a virtually unconstrained approach versus the benchmark. This allows for tactical and strategic allocations in investing in government bonds, other fixed-income, currencies, credit and emerging markets.

One of the few constraints is a maximum allocation to securities rated below BBB. While the fund is nowhere close to its 25% limit -- currently holding less than 15% -- it's significantly overweight in BBB-rated fixed-income securities. Amundi believes corporate yields remain attractive relative to those of government bonds, and that BBB-rated securities currently offer a good degree of liquidity.

The ongoing situation in Russia -- the effect of falling oil prices on government revenue, the involuntary devaluation of the ruble and the conflict with Ukraine -- has had little effect on the NEI fund. Amundi has only a small exposure to emerging markets and doesn't hold any securities issued in Russia.

On the contrary, to the extent that Russia's market woes reverberate throughout Europe and beyond, Amundi believes this could lead to buying opportunities in the fixed-income markets that it does find attractive. "The situation in Russia might cause some volatility," says Dubreuil, "but that's what we like because volatility creates opportunity."

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