Marketing communication – For professional investors only
Investors are building strategic exposure to cash as money markets seem to be well positioned deep into 2025.
European money markets are currently offering gross yields close to 4 percent. Even with expected rate cuts, ECB rates are likely to stay above 3 percent for the foreseeable future. For most institutional investors, those kinds of levels demand a structural allocation to cash.
The alternatives are fixed income markets, which may remain volatile throughout 2024 due to rates moves, slow economic growth and geopolitical risks. Dividend yields for European equities are likely to be around 3.6 percent in 2024 but, with European markets at all time highs, capital is at risk. And yields from 10-year Bund between 2.2 percent and 2.3 percent do not appear to offer value, by comparison.
«It’s rarely been truer that cash is king,» says Alain Richier, Head of money markets at Ostrum Asset Management, an affiliate of Natixis Investment Managers. «If you can get 4 percent for cash, why buy long-maturity bonds with lower yields and higher volatility?»
Investors Considering up to 20 Percent Cash Allocations
There is no guarantee that any asset class will beat cash over the next year or two.
Better still, as a strategic allocation, there is extremely low correlation between cash and other asset classes, so investors can get instant portfolio diversification effects through money markets.
The European Central Bank (ECB) raised interest rates on 10 separate occasions from July 2022 to October 2023, increasing the rate from -0.5 percent to 4 percent and putting to bed a decade of negative rates.
Although the next moves are likely to be down as inflation eases, rates will remain above 3 percent into 2025, according to Ostrum AM’s macro team whose macroeconomic scenario includes forecasts on growth, inflation, currencies and interest rates. Ostrum AM’s money market committee then analyses market data relative to current and anticipated interest rates curve and generates views on short-term yields.
«We see money markets earning better yields than most of bonds deep into 2025,» says Xavier-André Audoli, Head of Insurance Multi-Assets.
Solid fundamentals among investment grade issuers
Rates are likely to fall only gradually, but what of the risk to credit quality from inflation?
Money market managers must adopt a cautious approach, investing only in «high credit quality issuers», as identified by investment firms. Firms must use their own resources to analyse issuers, which requires sufficient numbers of staff with the appropriate qualifications. The intended result is a wide range of credit profiles across money market portfolios, rather than money market managers clustering around the same names.
Ostrum AM’s money market final investment universe is composed of about 500 issuers. «Our very large credit analysis team means it is possible to study the credit quality of a larger number of issuers than most of our peers,» says Richier.
Ostrum AM’s proprietorial evaluation and rating process is distinct from the rating agencies in that it is forward-looking, whereas the agencies rely on historical data. It can also rate instruments that are not evaluated by the agencies, leading to an active and convictions-based approach to money markets.
Richier says fundamentals remain solid for investment grade issuers, due chiefly to these companies’ larger capacity to mitigate the impact of higher commodities and energy costs by either absorbing or passing on the costs. But the current economic situation could impact companies’ credit quality”. He says : «This is why we recommend to be cautious with credit exposure, particularly given that credit spreads are at a 2-year low and given the geopolitical risks in Europe and in the Middle East.»
Over the short and medium terms, Ostrum AM believes that most of the companies it covers will be able to cope with a possible economic downturn.
Geography Matters
Credit quality is further enhanced by country selection. Ostrum AM’s self-imposed rule is that all of its chosen issuers are located within certain OECD countries. In Europe, it considers companies only in the European Economic Area, excluding former Eastern Bloc countries but including the UK and Switzerland. In Asia, it invests in Japan, Australia and New Zealand. In the Americas, it allocates to the US and Canada only.
«We are very cautious in terms of our geographic approach,» says Richier. «Our working assumption is that other countries are riskier than the top 25 OECD countries,» says Richier.
When financial markets are «normal», issuers from countries outside this top 25 can provide higher returns. But as soon as there is a crisis or a spike in volatility, the credit spreads widen much more on these countries than on the top OECD countries.
Richier adds: «Our main aim is to protect capital and avoid losses. That’s why we impose this geographic rule, and why we are highly selective amongst periphery countries.»
- Read the full article here.
Written in March 2024
Additional Notes
Marketing Communication. For professional investors only. Past performance is not indicative of future results. All investments involve risk, including the risk of capital loss. The provision of this material and/or reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of services. Investors should consider the investment objectives, risks and expenses of any investment carefully before investing. The analyses, opinions, and certain of the investment themes and processes referenced herein represent the views of the portfolio manager(s) as of the date indicated. These, as well as the portfolio holdings and characteristics shown, are subject to change. There can be no assurance that developments will transpire as may be forecasted in this material. In Switzerland: This material is provided by Natixis Investment Managers, Switzerland Sàrl, Rue du Vieux Collège 10, 1204 Geneva, Switzerland or its representative office in Zurich, Schweizergasse 6, 8001 Zürich.
NATIXIS INVESTMENT MANAGERS Paris 453 952 681 Capital : 178 251 690 € 43, avenue Pierre Mendès-France, 75013 Paris www.im.natixis.com
OSTRUM ASSET MANAGEMENT - An affiliate of Natixis Investment Managers. French Public Limited liability company with board of Directors. Share capital €50 938 997. Regulated by the Autorité des Marchés Financiers (AMF) under no. GP 18000014. RCS Paris n° 525 192 753. 43 avenue Pierre Mendès France 75013 Paris, France. www.ostrum.com
