Mandatum Life Allocation portfolio management – May
ML Allocation basket returns were between +0.14% and +0.55% in May.
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. As a result, inflation expectations and, in recent months, also actual inflation have risen. In the USA, the consumer price index climbed as much as +5% in May, while advance information suggests that the inflation rate in the euro zone remained at around +2%. Regarding inflation, the key question is whether the rise in inflation is short-lived or longer term. The sudden acceleration of inflation can partly be explained by a weak comparison period – the Covid-19 spring – and a strong rise in raw material prices over the past 12 months. 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.
Stock market movements have been moderate in recent weeks. The big picture remains intact, with continued strong earnings growth and cyclical sectors benefitting from economic recovery. 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. In addition to earnings growth, the low return expectation on fixed income investments is a reason why many investors prefer to stick with equities despite a relatively high valuation level. We have not made any major changes to our equity investments over the past few weeks as the market situation has remained intact. This year, gradually shifting the focus of equity investments towards cyclicals has proven to be the right decision.
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. In May, we reduced investment grade corporate bonds with longer interest rate risk whose return level has fallen close to zero as a result of good price development. Correspondingly, we have somewhat increased corporate bonds with shorter interest rate risk, focusing on the Nordic market. 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.