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January 2013
Going global in fixed income
Agenda
Going global in fixed income
China – another debt bubble in the making?
M&G Global Macro Bond Fund
The US – a comeback story
Going global in fixed income
Going global with M&G in fixed income…
Source: M&G , as at 22 November 2012.
… and exploiting investment opportunities in a £33 trillion market
A fully flexible global bond fund has a more than 20 times bigger opportunity set than any pure UK fixed income fund
£33 trillion market£
bn
Source : Bloomberg, as at 31 December 2012. The face value of global bonds outstanding is calculated on the basis of the Merrill Lynch Global Sovereign Broad Market Plus Index, Merrill Lynch Global High Yield and Emerging Markets Index and Merrill Lynch Global Broad Market Corporate Plus Index. The face value of UK bonds outstanding is calculated on the basis of the Merrill Lynch Sterling Corporate & Collateralized Index, Merrill Lynch Sterling High Yield Index and the Merrill Lynch UK Gilts Index.
Face value of global vs. domestic debtFace value of global vs. domestic debt
Sterling is up over 16% since 2009Hurting our exports, while we remain addicted to imported goods
A current account deficit this large has historicallypreceded a sterling crash Source: ONS, Bloomberg, as at December 2012.
2008-09 sterling-19% vs US dollar, -17% vs euro
1975-76 sterling-28% vs US dollar, -29% vs Deutsche mark
1990-91 sterling-20% vs US dollar, -15% vs Deutsche mark
% o
f G
DP
UK current account balanceUK current account balance
2012
China – another debt bubble in the making?
Hunga
ryEgy
ptUkr
aine
Roman
iaM
exico
Kazak
hsta
nPhi
lippi
nes
Croat
iaVen
ezue
laSou
th A
frica
Peru
Indo
nesia
Korea
Colom
bia
Niger
iaPol
and
Russia
Chile
Indi
aTur
key
Thaila
ndM
alay
siaBra
zilLe
bano
nChi
na
-5
5
15
25
35
45
55
-5
5
15
25
35
45
55
2011
2010
2009
Chinese GDP growth will have to slow down
China – the world’s biggest credit bubble since 2009
Annual change in private credit as % of GDP, 2009-11Annual change in private credit as % of GDP, 2009-11
Source : IMF Global Financial Stability Report, April 2012
Emerging markets are not a safe haven
A China slowdown has a significant impact on its trading partners
Source: Bloomberg, as at 31 December 2012
Which one do you want to be long or short of?
Emerging markets are not a safe haven
A China slowdown has a significant impact on its trading partners
Source: Bloomberg, as at 31 December 2012
130 bps
20 bps
The US – a comeback story
Net oil & gas import dependencyNet oil & gas import dependency
US is likely to become energy self-sufficient
Source: International Energy Agency, World Energy Outlook 2012, November 2012
80%
100%
40%
60%
0%
20%
-20%20% 40% 60% 80% 100%
China
United States
India
European Union
JapanGas imports
Gas exports Oil Imports
2010
2035
Heading for energy independence in the next 20 years
US
GD
P Y
oY
(%)
Ho
usi
ng
inve
nto
ry –
mo
nth
s’ s
up
ply
(i
nve
rted
sca
le)
weak growth
strong growthshort supply
large supply
US housing market indicates a solid economic recovery
Source : Bloomberg, as at 30 September 2012
The US economy looks in much better shape than the UK and the Eurozone – so how can this be reflected in the portfolio?
US new one family homes months’ supply (3m average) vs US GDP yoyUS new one family homes months’ supply (3m average) vs US GDP yoy
• Global construction materials
• Cyclical business, volatile cash flow
• Unsecured, NA/B-; M&G Rating: B
• Current yield = 5.6%
• Performance in 2012 = +40%
• Improving credit, favoured play on US housing market
Source: M&G, Bloomberg, as at 31 December 2012
Mortgages will be refinanced and new houses builtThe building materials and construction sector looks attractive to us
EUR 9.625% 2017
M&G Global Macro Bond Fund
M&G Global Macro Bond FundA flexible and focused global bond fund
Source: M&G as at 31 December 2012. Ratings as at 30 November and should not be taken as recommendations
A ‘go-anywhere’ total return global bond fund
Can Invest in all global fixed income asset classes and currencies
Designed to outperform the IMA Global bond sector with lower volatility
Fund size: £349 million
Fund positioning summaryM&G Global Macro Bond Fund
Key portfolio themesKey portfolio themes Geographic breakdownGeographic breakdown
%
We like the USD and have short positions in sterling, the Japanese yen, the Aussie dollar and Kiwi dollar as well as the SA rand
We like the USD and have short positions in sterling, the Japanese yen, the Aussie dollar and Kiwi dollar as well as the SA rand
We are very selective – some corporate exposure, but short positions in Brazil, Indonesia, Russia, South Africa & Turkey
We are very selective – some corporate exposure, but short positions in Brazil, Indonesia, Russia, South Africa & Turkey
Quality dominates. Generally we prefer credit over government bonds.
Quality dominates. Generally we prefer credit over government bonds.
Still overcompensates for default, but valuations have come closer to fair value
Still overcompensates for default, but valuations have come closer to fair value
Central banks no longer care about inflation, so we have 24% in linkers
Central banks no longer care about inflation, so we have 24% in linkers
Low duration of around 2.4 yearsLow duration of around 2.4 years
We prefer corporate issuers – but have added financials recently, particularly US banks.
We prefer corporate issuers – but have added financials recently, particularly US banks.
CurrenciesCurrencies
Emerging marketsEmerging markets
Government bondsGovernment bonds
High yieldHigh yield
InflationInflation
DurationDuration
Investment gradeInvestment grade
Source: M&G, as at 31 December 2012Source: M&G, as at 31 December 2012
Fund positioning summaryM&G Global Macro Bond Fund
Key portfolio themesKey portfolio themes Currency breakdownCurrency breakdown
%
We like the USD and have short positions in sterling, the Japanese yen, the Aussie dollar and Kiwi dollar as well as the SA rand
We like the USD and have short positions in sterling, the Japanese yen, the Aussie dollar and Kiwi dollar as well as the SA rand
We are very selective – some corporate exposure, but short positions in Brazil, Indonesia, Russia, South Africa & Turkey
We are very selective – some corporate exposure, but short positions in Brazil, Indonesia, Russia, South Africa & Turkey
Quality dominates. Generally we prefer credit over government bonds.
Quality dominates. Generally we prefer credit over government bonds.
Still overcompensates for default, but valuations have come closer to fair value
Still overcompensates for default, but valuations have come closer to fair value
Central banks no longer care about inflation, so we have 24% in linkers
Central banks no longer care about inflation, so we have 24% in linkers
Low duration of around 2.4 yearsLow duration of around 2.4 years
We prefer corporate issuers – but have added financials recently, particularly US banks.
We prefer corporate issuers – but have added financials recently, particularly US banks.
CurrenciesCurrencies
Emerging marketsEmerging markets
Government bondsGovernment bonds
High yieldHigh yield
InflationInflation
DurationDuration
Investment gradeInvestment grade
Source: M&G, as at 31 December 2012Source: M&G, as at 31 December 2012
Short positions
Global opportunity set and designed to achieve lower volatilityM&G Global Macro Bond Fund
Our most flexible bond fundSource: M&G, Morningstar as at 31 December 2012. Sterling X Inc class shares, UK database, net income reinvested, price to price.
To
tal r
etu
rn,
ind
exe
d t
o 1
00
71.5%71.5%
57.1%
44.6%41.6%33.5%32.8%
Credit crisis
Prices may fluctuate and you may not get back your original investment.
For financial advisers only. Not for onward distribution. No other persons should rely on any information contained within. This Financial Promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Services Authority and provides investment products. The registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No. 90776