Monthly Archives: December 2015

Axa IM’s Nicolas Trindade talks US versus eurozone debt, EMs and more

Axa Investment Management: Nicolas Trindade

In the latest in Hot Commodity‘s investor series, I chat to Nicolas Trindade, manager of the Axa Global Credit fund and Axa Sterling Credit Short Duration fund.

In an era of incredibly low bank rates in the Western world, bonds have been a popular route of investment for anyone looking for healthier returns. But with the Fed having kicked off its monetary tightening last week (and the Bank of England set to follow suit next year), is it game over for credit funds? Nicolas provides the answers…

“I think one of the biggest issues is that we’re victims of our own success,” said Nicolas.

“Investors have become used to double-digit returns and that’s not going to be the case any more – 2016 will see single-digit returns.”

Rising base rates inevitably push down bond prices, as investors start to look elsewhere. But Nicolas sees some tailwinds to counter the rising yields triggered by the central bank action: “credit spreads are tightening, which should counter the headwinds to some extent”. And he does emphasise that we’re still set to see growth, just slower growth.

The value of the Axa Sterling Credit Short Duration fund has risen from around £200m at the start of the year to £270m. It tends to invest in sterling-denominated debt that matures in less than five years, which Nicolas says provides some protection against rising interest rates.

“I think there will be more demand [for the fund] as I expect the Bank of England to hike rates in May next year – earlier than market consensus – which will impact returns,” said Nicolas. (Shorter duration bond funds are expected to fare better as rates rise). “It’s a low risk, conservative portfolio.”

Meanwhile the Axa Global Credit fund invests in corporate bonds, mostly denominated in dollars, sterling and euros, weighing in at around $100m (£67m) for most of this year.

Nicolas says that his current bias is towards the eurozone market, as it is not as advanced in the cycle as US corporate bonds.

“The US has been reissuing debt to satiate shareholders. Leverage for US corporates has increased, while in the eurozone it has stayed the same,” he said.

“25 per cent of issuance in euros is from US corporates as the funding costs are cheaper in Europe.”

Although he expects to see some changes in 2016.

“I expect US corporates to continue re-leveraging but less quickly,” he said. “The Fed started tightening last week and we expect three more rate hikes in 2016, so US corporates will start to be less and less aggressive.

“Meanwhile eurozone corporates will push up leverage, as they are under a lot of pressure to return money to shareholders. At the moment they are sitting on a lot of cash.”

Where does sterling sit?

“There’s not much supply in the sterling market,” he added. “A lot of householders including Royal Mail and Nationwide have issued bonds in euros, as it opens them up to a larger investor base and the costs are cheaper.”

And what about emerging markets?

“I’m quite cautious on emerging markets,” said Nicolas. “You now have to divide them between oil producing countries and oil consuming countries – the oil producers are obviously struggling due to the low oil price.

“We have exposure to some investment grade companies in emerging markets but no exposure to high-yield emerging markets and I’m not planning to increase that.”

Do you agree/disagree with Nicolas? Email info@hotcommodity.co.uk with your views.

Glencore’s update is better than expected, but miners are set for more pain

On a day like this, Glencore must still be plagued with shopper’s remorse over its badly timed acquisition of miner Xstrata back in 2013. The deal added masses of mining operations to the commodities trader’s business, which have struggled in the commodities price rout.

But the company, which is making grand efforts to reduce its staggering $30bn (£19.8bn) debt pile, today surprised the market with a more ambitious than expected plan to cut its borrowing and hopefully save its treasured investment grade credit rating.

It has increased its debt reduction measures to $13bn, up from $10.2bn, and has a new net debt target of $18-19bn by the end of 2016, an improvement from its previous target of low $20s bn.

It says it has $8.7bn of these cuts already locked in.

Safe to say, the market loved it. Glencore, which has seen its share price plunge by almost three quarters on the FTSE 100 index this year, gained 14 per cent by mid-morning trading.

“Glencore is well placed to continue to be cash generative in the current environment –
and at even lower prices,” said boss Ivan Glasenberg. “We retain a high degree of flexibility and will continue to review the need to act further as required.”

But will Glencore’s efforts be enough? With slowed growth in China and the eurozone severely denting demand, everyone can speculate but noone quite knows just how far commodities prices could fall. As Ivan suggests, there may be a need for Glencore to act further. I certainly do not think this will be the last of it. How can it be, when there is no end in sight to weak pricing?

As for the other miners, Anglo American made its own savage cuts earlier this week, shedding 85,000 staff, with all eyes on BHP Billiton to make the next move.

It seems likely that the latter will follow Glencore and Anglo and suspend its dividend as part of its cost cuts. The sector is hemorrhaging money and nothing seems quite big enough to stem the flow…

Other people’s money: why the Bank of England needs to raise rates

Legal and General Investment Management’s chief economist has urged the Bank of England to start raising rates, amid fears of an impending consumer debt crisis.

“So many UK customers are on variable rate mortgages – more than in the US,” said Tim Drayson. “I think it’s important to get the process of rate rises underway and normalise it, as the longer you leave it, people will take on more debt…then you’ve got potential for a harder landing.”

“Unsecured credit is starting to get frothy again,” he warned. “There is scope to use macroprudential tools…[but] interest rates is one way of doing this and getting in to all the cracks [of the financial system].”

The Bank of England base rate has remained at 0.5 per cent for more than six years. Doves argue that it should stay this way due to low inflation figures, while hawks say that wage growth and excessive lending need to be addressed.

Drayson said that LGIM is “more hawkish than the market”, although he commented that the UK “is a bit of a wildcard” as its growth depends greatly on whether commodity prices recover or not.

Brent crude is currently lingering at around $43 a barrel, with the $115 of summer 2014 but a distant dream. LGIM attributes the decline to an increase in supply, rather than a slowdown in industrial production in China and the eurozone.

ECB’s QE plan is widening gap between rich and poor, but it has no choice

The European Central Bank is set to announce whether it wants to extend its quantitative easing programme in the eurozone this Thursday. Andreas Utermann, global chief investment officer at Allianz Global Investors, is confident that the ECB will do what is expected and the market will get the liquidity it wants.

“The European Central Bank’s plan, although they might not admit it, is to keep the euro cheap,” he said at the asset manager’s Market Outlook 2016 roundtable. “The tap of liquidity is turned on and it is not getting turned off.”

The ECB launched its bond-buying programme in January, pledging to splash out about €60bn a month from March 2015 until September 2016, hoping to rocket-launch inflation from its near-zero doldrums to a sparkling two per cent.

But growth has not picked up as quickly as some hoped and there have been hints from the central bank that they may extend the programme. ECB president Mario Draghi recently said that the central bank will “do what we must” to return inflation to its two per cent target “as quickly as possible” – a strong hint of further action.

But all this easy money comes at a price.

“Noone is writing about the social impact of quantitative easing,” said Andreas. “It widens the gap between rich and poor. But noone is addressing it due to lack of other options.”

In the US, former Republican presidential candidate Mitt Romney has blamed QE for rising inequality as it “held down interest rates” and “caused the stock market to rise”.

Here in the UK, pensions minister Ros Altmann has complained that the bond-buying programme has resulted in a huge tax increase on pensions – with pensioners relying on interest income – and a tax cut for banks, borrowers and the wealthy.

And Bank of England research back in 2012 said the policy had boosted asset prices and made the rich richer.

But as Andreas says, what is the other option? Answers on a postcard please, or even better, email info@hotcommodity.co.uk with your views.