Michael Kelly, Pinebridge Investments
After governments implemented Covid-related monetary accommodations to lift the economy out of the pandemic, the markets are now facing headwinds as the US Federal Reserve charts the most aggressive rate hike path in decades.
This leaves active and passive investors alike struggling, as risk assets face challenges from stagflation worries and geopolitical tensions, while safety assets offer sparse returns.
Speaking to a media briefing, Michael Kelly, global head of multi-asset at Pinebridge Investments, said he expects bond yields to continue to rise for quite some time, and investors should look at two strategies.
First, he believes it is time for investors to reengage in China property bonds, which has been a controversial area.
“It’s been in the eye of the storm, but with the People’s Bank of China now beginning to supplement selective credit easing with some more broad base liquidity easing. We think that is going be a real boost for China property bonds now,” Kelly added.
Yet, he warned investors need to choose likely stronger survivors which will benefit as some of the red line crossers are now driven out of the business.
Second, the multi-asset expert recommends that investors look for strategies that are less correlated with the real interest rate, such as European Union (EU) carbon credits and commodities-carry trades.
EU carbon credits were formalised as a central policy tool to reach member states’ decarbonisation targets.
With a reluctance to sell excess supply, the long-term price of carbon allowance is projected to increase over time.
Moreover, carbon credits can be used to hedge rising input prices for European industrials and utilities arising from higher carbon prices, said Pinebridge.
“This will be a new alternative to capital appreciation. You’ll still want to own some equities and treasuries, but perhaps less than before, and supplement the portfolio with carbon credits for capital appreciation and carbon carry as a defensive asset,” said Kelly.
Another favourite asset class for Pinebridge is commodities, because of the current level of backwardation.
“Our view is to buy commodities when they are below replacement cost,” said Kelly.
“When commodities spots go from the floor to the ceiling, the curve gets very backwardated, which means the future prices on those commodities are not as high as the spots.”
The backwardation levels of commodities are at record-highs now, driven by unusually tight supply and the exacerbating military conflict, but are expected to normalise eventually.
As commodity producers hedge by selling futures prices at a discount during high backwardation levels, they offer investors an insurance premium when they buy deferred futures in comparison to prompt futures, said Kelly.