In this interview with MAPFRE AM’s, Daniel Gómez, fixed income manager, Daniel explains that taking the macro situation and monetary policy expectations into consideration, it is time to increase the duration in portfolios, prioritising short and middle sections of the yield curve.
How long have you worked at MAPFRE AM and what are your responsibilities?
I have been working at MAPFRE for 32 years (I started at MAPFRE-Indosuez) and my responsibilities have always involved managing interest rates for MAPFRE AM’s mutual fund and pension fund portfolios. More specifically, I am in charge of the analysis and investment management of our portfolios in public and semi-public debt denominated in euros and issued by eurozone countries. We analyse the macroeconomic situation, the imbalances and strengths of the different countries with a view to adopting investment strategies accordingly.
What can we expect following the rate cut by the ECB? Are we on the verge of a rate cutting cycle? And in the USA?
Following the recent interest rate cut by the European Central Bank (ECB), taking into account the low economic growth expected for the eurozone and provided that inflation remains under control (in particular, underlying inflation), we can expect up to two further cuts this year, in the third and fourth quarter. Depending on the macroeconomic data, we could see further cuts in 2025.
The situation in the USA is different. The resilience of the US economy and, most importantly, the strength of its labour market, could make it difficult to bring inflation under control, limiting and even cancelling out the possibility of any rate reduction by the Federal Reserve (Fed) this year. If this is the case, it will be difficult for the ECB to go much further in relaxing its monetary policy. However, our baseline scenario is for the Fed to make at least one cut in the US, perhaps after the presidential elections.
How would the markets react if the start of this new cycle be confirmed?
The likely reaction of the markets would be a relaxation in yields negotiated, in particular in the short term. We do not expect major variations bearing in mind that much of this movement is priced. On the other hand, equities could continue to find support despite the levels achieved. As we are well aware, there is always the risk of unforeseen circumstances that could alter this baseline scenario.
Bearing in mind the macro situations in Europe and the United States, what moves should investors make? Is it time to increase portfolio durations? What options do conservative investors have against this backdrop?
Taking into account the macroeconomic situation and monetary policy expectations, now would be the time to moderately increase exposure to interest rates (duration), prioritising medium and short sections of the yield curve and investing in issuers with recognised standing. At MAPFRE AM, we offer a wide range of funds that adapt to the profile and risk tolerance of each investor.
Analysts are now starting to discuss the risk of reinvestment after the ECB’s rate hike and the increase in instruments such as treasury bonds. What is the best way for investors to protect themselves?
The best way of protecting against reinvestment risk, now that the cycle of interest rate cuts by monetary authorities seems to have begun, is to delegate management to professionals through funds such as those offered at MAPFRE AM.
Progressively more institutions are warning about key economies becoming overindebted. How can this affect countries and investors in the long term?
Without a doubt, the general increase in macroeconomic imbalances and the over-indebtedness of national economies in particular is one of the main risks that investors should bear in mind.
In recent years, the markets have been very forgiving to this end. The intervention of central banks and their quantitative easing programs have allowed Spain and most of our neighbouring countries to relax risk premiums. Once central banks start to withdraw from debt markets, states will need acceptable economic growth rates as well as budgetary discipline to avoid suffering in the markets.
For the time being, the high liquidity in the system combined with the central bankers’ desire to ensure market stability continues to support risk premiums; however, this fragile balance can easily be broken should the risk of reduced fiscal discipline be perceived, as we have seen recently after the French elections. With this in mind, we must insist once again on the recommendation of placing investments in the hands of professionals like those on hand at MAPFRE AM.
