Fund and portfolio managers are having one of the most placid years in memory. Most Stock Exchanges have achieved returns of more than 15%, with low volatility, and the bonds have hardly caused scares. Less than six weeks before the end of the fiscal year, there are many who value reviewing their portfolio strategies to reduce risk and face the last bars of the year with greater peace of mind.
Several clouds are hovering over the horizon and they could spoil the good returns: the re-outbreak of the coronavirus in Central Europe and the consequent restrictions, such as the confinement that will return to Austria on Monday; or strong inflation and the withdrawal of stimuli from central banks. In fact, the Ibex closed its worst week since October 2020 on Friday, before the vaccines were known.
Francisco Quintana is director of investment strategy at ING in Spain and has more than 20 years of experience in asset management. “I have seen a lot that desire to try to tie the results when the end of the exercise comes, especially in the most active managers ”, he explains.
The most drastic way to reduce risk in portfolios is by selling the Stock Market. The S&P 500 index in the United States accumulates a 25% return for the year and the Stoxx 600 a 22%. For many managers it can be tempting to undo the positions where they have achieved the most capital gains, increase liquidity and wait for further corrections to enter the market.
“Too it is frequent that the weight of bonds rises, that have less volatility, or that smaller companies are sold to buy larger ones, which involve less risk, ”says Quintana.
All in all, ING’s main bet for its clients is the Orange Portfolios, which are funds that invest in low-cost index funds. In these cases, the entity does not have an active portfolio risk reduction policy, although there is a certain effect due to rebalancing. “If a client has a profile of 60% Stock Market and 40% bonds, as equities have appreciated a lot, the normal thing is that the weight has increased, and now has 63%. So we have to sell some of the stock market to rebalance the portfolio ”, explains the manager.
Since the summer, the two topics that have monopolized the conversation of the investment community have been the inflation (and the bottlenecks that have caused it) and its effect on the progressive normalization of monetary policies.
The latest inflation data from the United States set off all the alarms. In October, prices grew at a year-on-year rate of 6.2%, a level not seen in 30 years. In the euro area they increased at a rate of 4.1% and in Spain at 5.4%.
John Reinsberg, number two of the American manager Lazard –a firm that manages assets worth 202,000 million euros–, who has visited Madrid these days to meet with clients, comments that “it is normal that there has been nervousness among investors with these strong price rises, but from our point of view, the situation is already beginning to normalize”. The investor considers that there are positive signs such as “the drastic fall in the Baltic dry index, which measures the price of moving grain on different routes and is a good leading indicator”. He also mentions that the managers of German industrial groups he has visited are conveying to the market “that the worst of the bottlenecks has passed.”
Most investors are clear that inflation has peaked and that it is going to be moderated. But the idea has permeated that in the coming years there will be a higher price level than in the last decade.
Pascal Blanqué is an investment director at Amundi, the largest fund manager in the euro zone. In his view, the design of investment portfolios for 2022 is especially challenging. “The main elements to consider in the construction of portfolios will be: yield, liquidity risk and exposure to growth and inflation risk,” he lists. His recommendation for investors is to start 2022 “light” in risk exposure and recalibrating it throughout the year, “with a focus on portfolio resilience against increases in bond yields.”
On the stock market, it bets on companies with a cyclical component, on emerging markets and on Europe compared to the United States. “The European stock market will be favored by the arrival of Next Generation funds.”
Regarding the type of sector in which to invest, José Ramón Iturriaga, manager of the Okavango Delta fund at Abante Asesores, agrees that companies with a profile value they have lagged a bit and will go higher. “After so many years of low interest rates, those who have pulled the most on the stock market car have been companies with a strong growth profile. When future cash flows were calculated, applying such a low discount when bringing them to present value resulted in very high valuations. But, little by little, when monetary policy is normalized, these types of companies will cease to be so attractive because higher discount rates will be applied, and managers will once again look at sectors that they have left forgotten, ”he argues.
Investment in these types of companies (mining, banking, oil) has performed very poorly in recent years. At the end of 2020, when the success of vaccines began to be demonstrated, they began to revalue strongly, in what was called “the Great Rotation” (managers who removed growth companies from their portfolios to incorporate more companies with a high profile). value, or cyclical) but in the middle of the year the trend stopped.
“The market is highly conditioned by the macro and interest rate expectations. Now again, with the confinement of Austria and the warning that the same could happen in Germany, people have been scared. But We must remember that we are much more prepared than in the previous waves and that the mortality rates that we saw last year we will not see again”, Considers Iturriaga. “Sooner or later, the waters will return to their course,” he adds.
The factor that has contributed the most this year to sustaining the financial markets has been the maintenance of the combined deployment of expansionary fiscal policies and monetary policies with low interest rates and the purchase of public debt. However, this scaffolding has begun to retreat.
The United States Federal Reserve (its central bank) confirmed on November 3 that it was already going to start reducing the volume of monthly debt purchases. Specifically, purchases of Treasuries will be reduced to $ 70 billion and those of mortgage-backed securities to $ 35 billion per month by the end of November. In early December, those amounts will be cut to $ 60 billion and $ 30 billion a month, respectively. The rate hike will arrive at the end of 2022, according to a panel of experts consulted by Reuters.
Who could get ahead of the rest of central banks is the Bank of england. Many analysts expected its monetary policy committee to agree to a rate hike at its Nov. 4 meeting, but let it pass. Now, with prices rising there at a rate of 4.2% (versus the 2% target), this rise seems more than likely.
“The best way to act in fixed income is to avoid restrictions, because there will be important divergences in monetary policies”, Says Blanqué, from Amundi. “The smartest thing is to also incorporate alternative assets to fixed income, such as investment in infrastructure, real estate or private debt.” In his opinion, investors should be prepared to look for portfolios that are not limited to having stocks and bonds, because there is an increasing risk that these two types of assets could fall simultaneously.
Thus, amid threats of new confinements, generalized price rises and the fear of a precipitous withdrawal of stimuli by central banks, many investors will prefer to take their foot off the gas and see how 2022 starts. Thank you in the US on the 25th, for many the unofficial closing date of the year in financial markets, may be the excuse for it.