Mandatum Life Allocation portfolio management – July
ML Allocation basket returns were between +0.23% and +0.57% in July.
The gradual removal of restrictions and the fiscal policy stimulus measures are expected to accelerate economic growth in the near future. However, as the delta variant of the coronavirus spreads, expectations of economic growth this year have dampened somewhat. At the same time, the worst fears of a spike in inflation have dissipated, and the interest rate level was showing a downward trend during the summer. 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. There are also arguments in favour of prolonged inflation. These include, among other things, strong budget stimulus while, in any case, the economy is already rapidly recovering. 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. Reduced stimulus or rising interest rates are not automatically a bad thing for the investment markets, provided that economic growth simultaneously strengthens. However, timing is key in reducing stimulus: by taking action too soon the central banks could put an end to economic recovery, but waiting too long would risk overheating the economy.
On the equity market, the big picture remains intact, with continued strong earnings growth and cyclical sectors benefitting from economic recovery. We have thus not made any significant changes to our equity investments. However, return expectations have been revised down following the stock price surge, suggesting that the equity markets are already pricing in a fairly favourable outlook for the next few years. A possible risk for the equity markets is that central bank stimulus will be reduced faster than expected due to the acceleration of inflation. In that case, companies with good pricing power are likely to do well, and cyclical sectors can also be expected to survive the tapering of stimulus if economic growth remains solid. Therefore, sufficient diversification across both geographical areas and sectors is an equity investor’s best bet.
The credit risk premiums on corporate bonds have remained low, due to which the return expectation is low and attractive opportunities are limited. This has led us to allow the weight of cash and equivalent money market investments to increase in the portfolios. 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 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. In June, we reduced the interest rate risk of our investments by selling part of a fund that invests in European corporate bonds with a long-term interest rate risk and a high credit rating. In June, we also switched to a fund that invests in emerging market USD bonds. The new, actively managed fund has three portfolio managers (Global Evolution, T. Rowe Price and PGIM) with mutually complementing approaches.
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. Diversification across various types of real estate and geographic areas is all the more important in the current environment. During this year, the improved investment environment has also had a positive impact on the valuations of alternative investments.