Category Archives: Investment

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.

Allianz GI’s UK equities fund manager on the merits of oil and why defensive stocks are losing their edge

In the first of Hot Commodity’s investor series, I chat to Simon Gergel, chief investment officer, UK equities at Allianz Global Investors, about which stocks are set to become a hot commodity next year and which ones will be yesterday’s news…

Simon says: oil majors

The fund manager is pretty bullish on large oil companies, which suggests that the sector is suitably distressed enough to become attractive. Simon thinks the oil giants are in a more promising shape than oil itself, as the depressed pricing environment has made the likes of BP and Shell cut costs and improve their business models. Although he is expecting the price of oil to rise in the medium term.

So will Allianz GI be ramping up its allocation to oil-focused equities? Simon did not rule this out. “We’ve already got quite a big position on oil companies and we have increased our position before,” he says.

Simon says: copper

Surprisingly commodities are not the pariah one might expect in the current pricing climate, dragged down by the growth slowdown in China. Or should I say SOME commodities. “It’s dangerous to generalise”, says Simon.

“A lot of production has been taken out of copper this year. It is much tougher to increase output for copper than for some other metals such as iron ore, as it uses deeper and more difficult technologies”, he says, the implication being that tightening supply will push up the price. “It is also less dependent on Chinese infrastructure. We’ve bought [FTSE 100-quoted Chilean copper miner] Antofagasta in the last six to nine months.”

Simon says: leisure

Other sectors on the Christmas wish-list are leisure stocks, such as gambling firms William Hill and Ladbrokes, cruise company Carnival, pub chain Greene King and satellite firm Inmarsat – “I see growth in marine and aviation communications”.

I asked Simon what he thought about fund guru Neil Woodford’s bullish stance on tobacco and healthcare.

“The problem with tobacco is that the valuations are so high now,” he says. “The product is on the decline in most parts of the world.”

Simon likes GlaxoSmithKline – “the Novartis deal transformed the business” – but that’s the only pharmaceuticals stock in his portfolio.

So what is leaving him cold?

“Defensive stocks/bond proxies have done well at a time of low rates,” he said. (Bond proxies are companies with healthy dividend yields and low volatility, that are seen as a safe-ish bet in poor market conditions).

But with rate rises imminent in the US and the UK, which will increase bond yields, Simon expects defensive stocks, including the likes of Unilever and Reckitt Benckiser, to become less attractive.

Simon expects an EU referendum in late spring/early summer. “Uncertainty around a Brexit could lead people to focus on global companies, which are less dependent on the UK economy,” he says.