Mandatum Life Allocation portfolio management – March
ML Allocation basket returns were between +0.45% and +4.57% in March.
On the investment markets, the focus is increasingly shifting to the post-Covid-19 period. Inflation expectations have strengthened along with improving economic growth prospects and increasing energy prices, which has initiated speculation of a gradual tapering of central bank monetary stimulus in the investment markets. As a result, market rates have climbed especially in the USA. In March, however, the greatest pressure for interest rates to rise seemed to ease, at least momentarily. Central banks in both the USA and Europe have repeatedly shut down talk of reducing stimulus measures and stated that it is premature to engage in this discussion. In the USA, economic recovery is also likely to gain a further boost from the federal state’s massive budget stimulus. There is a plan to push through another infrastructure, climate and employment stimulus package which, according to market speculations, would amount to USD 2,000–3,000 billion.
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 strengthen 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. Similarly, 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. In March, the equity markets were also impacted by the halting of the rise in interest rates, with investors appearing to take a timeout in increasing cyclical sectors. However, we do not see a change in the trend; we still consider cyclical sectors to be relatively attractive.
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. We have allowed the weight of cash and equivalent money market investments to increase in the portfolios. We have moderately increased the proportion of European senior loans in the portfolios. Senior loans are relatively attractive, because their return level has not been affected by the central bank policy as much as bonds. 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 return development 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. 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. In private equity investments, we are selectively active, looking for individual projects that are not debt-driven.