We close the first quarter of the year with a very good performance from risk assets, such as equities, at record highs, and credit, thanks to the fact that the markets are pricing the best-case scenario: resilient growth and moderately declining rates.
Economic activity remains robust, as fears of a recession dispel. Inflation, meanwhile, has begun to ease, especially in Europe, which could pave the way for rate cuts.
In March, Jerome Powell kept rates within the 5.25%-5.5% range for the fifth consecutive time, reiterating that interest rates have peaked and are expected to come down, though he warned about the risk of lowering rates too soon or too quickly. As such, the Fed will continue to closely monitor economic indicators like growth, employment, and inflation (“data-dependency”). The dot plot continues to project three cuts this year, with a more hawkish outlook for 2025. Futures predict a 60% chance of a decrease in June, though that probability is on the decline (90% in December 2023), given the strength of the US economy and labour market.
In Europe, Christine Lagarde also kept interest rates unchanged, laying the groundwork for a drop in June (for which the market gives odds of 75%), though she warned the process would be complex, requiring a revision of wages and business margins at each meeting. The ECB estimates that inflation will fall 2.3% this year (four-tenths less than its previous projection), reaching the 2% target in 2025 (one-tenth lower). It maintains GDP growth of 1.5% for 2025 and 1.6% in 2026.
Improved economic growth has had an impact on interest rates. We have seen rebounds in debt levels, given the postponement of rate cuts until June. Alternatively, the effect has been positive for credit spreads, which continue to narrow. As such, corporate credit currently outperforms government bonds.
In this scenario, the EDM Ahorro fund, with its flexible and conservative strategy, has reduced its exposure to sovereign debt to 31% of the portfolio. We have selectively increased the weight of investment-grade corporate credit by capitalising on market opportunities, and strategically included some subordinated debt issues in the portfolio, invariably after a thorough analysis of the issuers. The fund’s composition, with a mix of different strategies, seems appropriate in our view, given the current environment.
Duration, for its part, is kept close to two years. We believe that the opportunities offered by short-term issuers (promissory notes and corporate bonds) represent an add-on not yet offered by long-term equivalents. Regardless, the market can change quickly and we will be attentive to any data, so as to adapt the portfolio accordingly.
We maintain that at present the fund is well poised to face the new challenges of the macro environment and should continue to provide attractive results relative to the market, with contained volatility.
Karina Sirkia,
Fixed Income Fund Manager
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