Increasingly attractive returns on the bond markets
The investment experts at Raiffeisen KAG are not expecting interest rates to rise any further in the Eurozone or the USA. However, rate hikes take some time to unleash their impact on the economy, and this process seems to be taking longer in the USA this time around than on previous occasions. In the Eurozone, meanwhile, the European Central Bank (ECB) is fairly likely to consider its monetary policy too restrictive at some point in the coming year. This opens up a little scope for lower bond yields in the Eurozone and thus upside potential for bond prices. Even if inflation falls further (which it looks bound to do), however, it will remain above the ECB’s target of 2% until well into the coming year.
Although the US economy has so far proved much more robust than expected despite some rapid interest rate hikes, the fund management at Raiffeisen KAG is still anticipating a marked slowdown in economic growth and thus a number of interest rate cuts over the coming year.
Latest price declines unlock additional earnings potential
Bond yields have risen markedly in the USA recently, pulling those in Europe and most other parts of the world up too in their wake and thus piling more pressure on Emerging Markets bonds as well. By contrast, corporate bonds – particularly high yield bonds – have performed relatively well.
The bond markets currently offer attractive returns in virtually all maturity ranges and in many market segments, and the risk-return ratio looks better than it has done for over a decade. In fact, what we are seeing is a fairly unprecedented situation in which short-dated bonds are in the unusual position of offering slightly higher yields than their long-dated counterparts. This is a reflection of significant recession risks as well as the widespread expectation that inflation will decline sharply and that interest rate cuts will begin fairly soon.
Investing globally yet also sustainably
Raiffeisen-ESG-Global-Rent is an attractive option for investors in light of the positive outlook for large parts of the global bond markets. By covering much of the global bond universe, the fund offers good global risk diversification across economic areas, issuers, and currencies. Amongst other things, it includes bonds issued by governments and companies in both the developed and emerging markets as well as being managed in line with a sustainable investment concept.
Dedicated sustainability concept for countries
Whilst some quite good standards are now available for measuring sustainability in the corporate world, this is much harder to do for sovereign issuers. One need only consider the wide range of government policies and public-sector projects that can meet – or, conversely, violate – economic, social, and corporate governance (ESG) criteria in any number of ways. And, as we know, sovereign issuers cannot be compared to companies in terms of their actions and objectives as a general principle so need to be assessed in a different way. This is why the fund management has worked diligently for years to develop a sustainability concept dedicated to investments in government bonds.
Besides setting minimum thresholds for ESG indicators, the fund management also focuses on the direction a bond’s performance is heading and not just what it currently happens to be returning. This is because, like in the corporate sector, lasting improvements in ESG criteria should boost the economic and financial state of the relevant countries and thus also be reflected in bond performance. Waiting to invest until a significant portion of the improvements has already happened would mean letting a great deal of earnings potential slip away. Where a country cannot be rated as sustainable (such as the USA), the fund invests in bonds issued in US dollars by national and international development banks.
Further reading on this topic:
Assessing the sustainability of countries
Positive global outlook for bonds
There is a good chance of falling yields (i.e. rising bond prices) in many parts of the world over the next 12 to 18 months, although the geopolitical and economic risks must not be underestimated. With its very high level of global diversification, however, the fund is well equipped to meet the challenge. It now offers much improved earnings potential because considerably higher interest earnings can now be generated than was possible in the past few years. Raiffeisen-ESG-Global-Rentremains a good investment for global risk diversification as it covers much of the global bond universe.
The Fund Regulations of the Raiffeisen-ESG-Global-Rent have been approved by the FMA. The fund may invest more than 35 % of the fund's volume in securities/money market instruments of the following issuers: United States, Japan, Germany, France, United Kingdom.