Flash Note

Fixed Income Update Prepared for the New Wave

10.11.2020

Although the shutdown of activities has made the recovery more sluggish than ever, both Central banks and governments are providing unprecedented support, as confirmed by Christine Lagarde during the ECB monetary policy meeting last week, while a vaccine could be approved in the coming months opening the door for higher inflation expectations and positive economic surprises. The recent stricter lockdown measures implemented in Western countries don’t have a significant impact on our base case scenario of having a vaccine produced and distributed in H2 2021.

To navigate this “lower rate for longer” environment, our Fixed Income strategies follow a “Barbell strategy”, balancing a high conviction core allocation to selective corporate credit, European subordinated financial debt and sovereign bonds (non-core Europe & EM) while counterbalancing these exposures by higher level of cash & equivalents, long duration towards core sovereign yields and an active management of protections & cash.

Our views by region:

Jump to a section on the page

UNITED STATES

[Small Tile] [Flashnote] [CP] USA Flag

The Federal Reserve is expected to support the recovery and prevent any unwarranted tightening of financial condition. Having a slightly long bias in US duration positions help Fixed Income portfolios in case of risk-off environment, that could arise be it linked to the virus/vaccine, growth-related, tight elections even if democratic sweep seems largely priced in but both polls & bookmakers have been wrong and dispute over results remains a possibility.

EUROZONE

In the Euro Area, valuations induce a limited downside potential on rates which would require further rate cut which appear unlikely over the short-term. Lagarde dovish intervention last week has confirmed that the ECB should intervene in December, probably through PEPP extension and/or further TLTROs which should favor carry strategies and potential spread compression on non-core sovereign debt and corporate credit bonds.

G10 COUNTRIES

In G10 countries, Australia appears particularly attractive on the rates side. We could see more easing going forward even if the RBA cut rates and announced a $A100 QE recently. Going forward, the fiscal policy should be more expansionist which would require the Reserve Bank of Australia to reinforce its non-conventional monetary policies to absorb the expected higher debt supply and to depreciate the currency.

EMERGING MARKETS

At this stage, we remain cautious on emerging markets given the decline in capital flows and a fall in exports. Nevertheless, from a macro perspective, our team is closely monitoring the situation as the weaker US Dollar could lead to a more positive context for EM. Even if the overall EMD asset class does not present a very attractive risk/return profile, some countries represent an opportunity to continue generating higher returns like China, as slow employment recovery and the importance of the services sector suggests that the PBoC should keep a dovish policy for some time. Valuation wise, Chinese 5-year spreads versus developed market are close to all-time high at roughly +3% (source: Bloomberg, index W2G1).


To understand our positioning by Fund:

This is an advertising document. This document is intended for professional clients and has not been submitted for FSMA validation. This document is published by Carmignac Gestion S.A., a portfolio management company approved by the Autorité des Marchés Financiers (AMF) in France, and its Luxembourg subsidiary Carmignac Gestion Luxembourg, S.A., an investment fund management company approved by the Commission de Surveillance du Secteur Financier (CSSF), pursuant to section 15 of the Luxembourg Law of 17 December 2010. “Carmignac” is a registered trademark. “Risk Managers” is a slogan associated with the Carmignac trademark. This document does not constitute advice on any investment or arbitrage of transferable securities or any other asset management or investment product or service. The information and opinions contained in this document do not take into account investors’ specific individual circumstances and must never be interpreted as legal, tax or investment advice. The information contained in this document may be partial and could be changed without notice. This document may not be reproduced in whole or in part without prior authorisation. The risks, fees and ongoing charges are described in the KIID (Key Investor Information Material). The prospectus, KIID, the net asset-values and the latest (semi-) annual management report may be obtained, free of charge, in French or in Dutch, from the management company (tel. +352 46 70 60 1). These materials may also be obtained from Caceis Belgium S.A., the financial service provider in Belgium, at the following address: avenue du port, 86c b320, B-1000 Brussels. The KIID must be made available to the subscriber prior to subscription. The subscriber must read the KIID before each subscription. Carmignac Portfolio refers to the sub-funds of Carmignac Portfolio SICAV, an investment company under Luxembourg law, conforming to the UCITS Directive. The French investment funds (fonds commun de placement or FCP) are common funds in contractual form (FCP) conforming to the UCITS Directive under French law. Access to the Fund may be subject to restrictions regarding certain persons or countries. The Funds have not been registered under the US Securities Act of 1933. The Funds may not be offered or sold, directly or indirectly, for the benefit or on behalf of a «U.S. person», according to the definition of the US Regulation S and FATCA. In case of subscription in a French investment fund (fonds commun de placement or FCP), you must declare on tax form, each year, the share of the dividends (and interest, if applicable) received by the Fund. A detailed calculation can be performed at www.carmignac.be. This tool does not constitute tax advice and is intended to serve solely as a calculation aid. This does not exempt from having to perform the procedures and verifications incumbent upon a taxpayer. The results indicated are obtained using data that the taxpayer provide, and under no circumstances shall Carmignac be held responsible in the event of error or omission on your part. Pursuant to Article 19bis of the Belgian Income Tax Code (CIR92), in the case of subscription to a Fund that is subject to the Savings Taxation Directive, the investor will have to pay, upon redemption of his or her shares, a withholding tax of 30% on the income (in the form of interest, or capital gains or losses) derived from the return on assets invested in debt claims. Distributions are subject to withholding tax of 30% without income distinction. The net asset-values are available on the website www.fundinfo.com. Any complaint may be referred to complaints@carmignac.com or CARMIGNAC GESTION - Compliance and Internal Controls - 24 place Vendôme Paris France or on the website www.ombudsfin.be.