February 2021 - US fiscal boost speeds up interest rates adjustment - Systematic Fund Manager's Comments

A clear fixed income market message

The acceleration in coming years growth and inflation expectations sent long-term interest rates close to levels last seen before March 2020. From an absolute perspective, these moves suggest the global economy is on course to rapidly close the output gap created by the pandemic. Market participants appear to believe DM central banks on the maintenance of short-term rates for a prolonged period since the rise in shorter-term rates has been contained so far. Nevertheless, the speed at which the steepening is happening brings question marks as to the digestion by the market of higher borrowing cost given the additional huge debt burden brought with Covid-19. In that respect, the below chart illustrates the severe shift in US and German Treasury yield curves in February 2021. It is interesting to note that the steepening in place since the summer of last year, less pronounced in Europe than in the US, has become broad-based.

US & Germany Treasury Yield Curve Shift
28.02.2021

Source: Bloomberg, RAM AI, as of 28.02.2021

Liquid financial assets – any juice left ?

The market rally in place over the past 11 months has been impressive by any measure. Once the market absorbs all the positive news related to the unprecedented fiscal and monetary support, we expect a return to fundamentals and the recent move in interest rates is bringing it in our view. For instance, companies with no ability to generate positive earnings and which had an easy access to liquidity may well face difficulties in a world with higher financing costs. The market continues to present attractive opportunities, but it has become very fragmented and extreme for certain segments. Consequently, market gyrations in global liquid financial assets will be part of the investment landscape in the coming months. In that respect, our observations are as follows:

• High dispersion in equity and fixed income markets
• Shorter-term strategies will play a key role
• Importance of fundamental strategies
• Long/Short strategies to benefit from the current high dispersion and inefficiencies
• Diversification and liquidity remain of utmost importance

At RAM AI, several of our strategies are well-equipped to benefit from the adjustment/recovery the world economy is going through:

• RAM Macro Systematic strategy

Nowadays the pace at which a market is shifting between Bull and Bear regimes is almost 5 times faster than 25 years ago. Our Macro Systematic strategy exploits dispersion in global liquid financial assets, it uses a large number of short, medium and long-term strategies and aims to capture the interdependence across and within asset classes. The strategy’s objective is to provide decorrelation in a portfolio context and provide investors positive returns when it is the most needed. Q4 2018 and March 2021 are among the most recent examples, during which our Macro Systematic strategy was able to deliver strong positive returns. Since the beginning of the year, the fund has been shifting its exposure from long government bonds to short as a result of the strength of shorter-term signals.

• RAM Fixed Income strategies

Flexible, liquid and diversified fixed income strategies will benefit from the implications of interest rates volatility. Our Global Bond solution, which combines a traditional investment approach with non-traditional strategies has proven its ability to mitigate downside in fixed income markets while capturing the upside. The recent volatility in rates and the impact on the market offer interesting opportunities for our strategy. Additionally, our Asia Bond strategy, focusing on an asset class which is less sensitive to interest rates adjustment than other EM regions, represents a compelling solution for investors seeking for higher yield in a region with strong macroeconomic fundamentals.

• RAM Equity strategies

Our Quality-biased and All-cap equity selection process has been delivering strong alpha when the market turned the focus to fundamentals. Given the high dispersion in place, both our Long-Only and Long/Short strategies are set to capture the inefficiencies. On top of the that, the Value and Mid & Small Cap buckets within our diversified strategies could turn to be main beneficiaries in a continued economic reflation environment. Finally, our emphasize on ESG data integration makes our equity offering as one of the few All-Cap solutions with strong sustainability rating.