Mandatum Life Allocation portfolio management – April
ML Allocation basket returns were between +0.04% and +2.44% in April.
On the investment markets, the focus is increasingly shifting to the post-Covid-19 period. Private consumption is growing as restrictions are lifted and stimulus packages are expected to increase public expenditure in the next few years. Inflation expectations have strengthened along with improving economic growth prospects and increasing energy prices. Regarding inflation, the key question is whether the rise in inflation is short-lived or longer term. Central banks have retained their stance that this is a temporary development linked to the re-opening of economies. In the short term, the rise in inflation is thus not expected to alter the monetary policy stance. However, if inflation remains high for a longer period, the central banks may have to respond to it by reducing their monetary stimulus earlier than expected. Central banks in both the USA and Europe have repeatedly shut down talk of reducing stimulus measures, stating that it is premature to engage in this discussion and pointing out that the labour markets are still in the process of recovery. The central banks’ communications highlight a long enough commitment to continuing stimulus policies.
The equity market return expectation for the near future has become more moderate as a result of the rise in stock prices. However, economic recovery is expected to boost earnings growth this year, which will support stocks. The recovery of the economy improves the outlook of cyclical sectors in particular, such as industrials and financials. Correspondingly, in interest rate sensitive sectors, such as technology, utilities, consumer staples and health care, the rise in interest rates puts pressure on the valuation level, although it does not have a direct impact on companies’ business. We currently consider the sector allocation to be key in terms of the return formation of the equity portfolio. Since November, we have gradually moved in a more cyclical direction. We increased the share of US industrials in our equity investments and reduced the weight of the US technology sector.
Credit risk premiums on corporate bonds have remained low. As inflation accelerates, the interest rate level is under pressure to rise rather than to decline, due to which the return expectation is low and there are few attractive opportunities. In fixed income investments, the focus is on our domestic market, on Nordic companies, which we know well and in which we see good return potential, in relative terms. We have moderately increased the proportion of European senior loans in the portfolios. We do not invest in euro-zone government bonds due to the low return level, and government bonds account for a very small proportion of our fixed income investments. We have also moderately reduced the share of low-risk investment grade corporate bonds. This year, the performance of fixed income investments has been good: we have been successful in our corporate bond weights and, thanks to the moderate interest rate risk, we have not suffered much from the rise in interest rates.
According to our view, alternative investments will continue to play a key role also after the coronavirus crisis in building a long-term, well-diversified investment portfolio, as the interest rate level is likely to remain low for quite some time. In the current interest rate environment, long-term investors are well-advised to capitalise on the additional return offered by limited liquidity, i.e. the liquidity premium. We continue to see opportunities for long-term investors in alternative fixed income investments. In real estate investments, we invest with portfolio managers specialised in property development, who are good buyers and have the ability to refine properties through active measures. In private equity investments, we are selectively active, looking for individual projects that are not debt driven.