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January 2013

Going global in fixed income. January 2013. Agenda. Going global in fixed income. China – another debt bubble in the making?. The US – a comeback story. M&G Global Macro Bond Fund. Going global in fixed income. Going global with M&G in fixed income….

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January 2013

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  1. Going global in fixed income January 2013

  2. Agenda Going global in fixed income China – another debt bubble in the making? The US – a comeback story M&G Global Macro Bond Fund

  3. Going global in fixed income

  4. Going global with M&G in fixed income… … and exploiting investment opportunities in a £33 trillion market Face value of global vs. domestic debt £bn £33 trillion market Source: M&G , as at 22 November 2012. A fully flexible global bond fund has a more than 20 times bigger opportunity set than any pure UK fixed income fund Source : Bloomberg, as at 31 December 2012. The face value of global bonds outstanding is calculated on the basis of the Merrill Lynch Global Sovereign Broad Market Plus Index, Merrill Lynch Global High Yield and Emerging Markets Index and Merrill Lynch Global Broad Market Corporate Plus Index. The face value of UK bonds outstanding is calculated on the basis of the Merrill Lynch Sterling Corporate & Collateralized Index, Merrill Lynch Sterling High Yield Index and the Merrill Lynch UK Gilts Index.

  5. Sterling is up over 16% since 2009 Hurting our exports, while we remain addicted to imported goods UK current account balance 1975-76 sterling -28% vs US dollar, -29% vs Deutsche mark 1990-91 sterling -20% vs US dollar, -15% vs Deutsche mark 2008-09 sterling -19% vs US dollar, -17% vs euro % of GDP 2012 A current account deficit this large has historicallypreceded a sterling crash Source: ONS, Bloomberg, as at December 2012.

  6. China – another debt bubble in the making?

  7. China – the world’s biggest credit bubble since 2009 Annual change in private credit as % of GDP, 2009-11 55 55 2011 2010 2009 45 45 35 35 25 25 15 15 5 5 -5 -5 Egypt Ukraine Hungary Venezuela Mexico Romania Kazakhstan Philippines Croatia Korea Colombia Nigeria China Russia Chile India Malaysia Lebanon South Africa Peru Indonesia Poland Turkey Thailand Brazil Chinese GDP growth will have to slow down Source : IMF Global Financial Stability Report, April 2012

  8. A China slowdown has a significant impact on its trading partners Which one do you want to be long or short of? Emerging markets are not a safe haven Source: Bloomberg, as at 31 December 2012

  9. A China slowdown has a significant impact on its trading partners 130 bps 20 bps Emerging markets are not a safe haven Source: Bloomberg, as at 31 December 2012

  10. The US – a comeback story

  11. US is likely to become energy self-sufficient Net oil & gas import dependency 100% Gas imports Japan 2010 2035 80% European Union 60% 40% China 20% India United States 0% Heading for energy independence in the next 20 years -20% Source: International Energy Agency, World Energy Outlook 2012, November 2012 100% 60% 80% 40% 20% Gas exports Oil Imports

  12. US housing market indicates a solid economic recovery US new one family homes months’ supply (3m average) vs US GDP yoy short supply strong growth Housing inventory – months’ supply (inverted scale) US GDP YoY (%) large supply weak growth The US economy looks in much better shape than the UK and the Eurozone – so how can this be reflected in the portfolio? Source : Bloomberg, as at 30 September 2012

  13. Mortgages will be refinanced and new houses built The building materials and construction sector looks attractive to us • Global construction materials • Cyclical business, volatile cash flow • Unsecured, NA/B-; M&G Rating: B • Current yield = 5.6% • Performance in 2012 = +40% • Improving credit, favoured play on US housing market EUR 9.625% 2017 Source: M&G, Bloomberg, as at 31 December 2012

  14. M&G Global Macro Bond Fund

  15. M&G Global Macro Bond Fund A flexible and focused global bond fund A ‘go-anywhere’ total return global bond fund Can Invest in all global fixed income asset classes and currencies Designed to outperform the IMA Global bond sector with lower volatility Fund size: £349 million Source: M&G as at 31 December 2012. Ratings as at 30 November and should not be taken as recommendations

  16. Fund positioning summary M&G Global Macro Bond Fund Geographic breakdown Key portfolio themes Duration Low duration of around 2.4 years Inflation Central banks no longer care about inflation, so we have 24% in linkers Government bonds Quality dominates. Generally we prefer credit over government bonds. % Investment grade We prefer corporate issuers – but have added financials recently, particularly US banks. High yield Still overcompensates for default, but valuations have come closer to fair value Emerging markets We are very selective – some corporate exposure, but short positions in Brazil, Indonesia, Russia, South Africa & Turkey Currencies We like the USD and have short positions in sterling, the Japanese yen, the Aussie dollar and Kiwi dollar as well as the SA rand Source: M&G, as at 31 December 2012

  17. Fund positioning summary M&G Global Macro Bond Fund Currency breakdown Key portfolio themes Duration Low duration of around 2.4 years Inflation Central banks no longer care about inflation, so we have 24% in linkers Government bonds Quality dominates. Generally we prefer credit over government bonds. % Investment grade We prefer corporate issuers – but have added financials recently, particularly US banks. High yield Still overcompensates for default, but valuations have come closer to fair value Short positions Emerging markets We are very selective – some corporate exposure, but short positions in Brazil, Indonesia, Russia, South Africa & Turkey Currencies We like the USD and have short positions in sterling, the Japanese yen, the Aussie dollar and Kiwi dollar as well as the SA rand Source: M&G, as at 31 December 2012

  18. Global opportunity set and designed to achieve lower volatility M&G Global Macro Bond Fund 71.5% 57.1% Credit crisis 44.6% 41.6% 33.5% 32.8% Total return, indexed to 100 Our most flexible bond fund Source: M&G, Morningstar as at 31 December 2012. Sterling X Incclass shares, UK database, net income reinvested, price to price.

  19. www.twitter.com/bondvigilantes www.bondvigilantes.com

  20. Prices may fluctuate and you may not get back your original investment. For financial advisers only. Not for onward distribution. No other persons should rely on any information contained within. This Financial Promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Services Authority and provides investment products. The registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No. 90776

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