In the current context of very low interest rates in Europe and a rates hike in the United States, given the uncertainty created by protectionist measures and the political crisis in Italy, our stance is as follows:
For the bond component:
Despite our preference for corporate bonds, we are neutral on these assets as their valuations are generally stretched. However, opportunities exist due to the flows supporting this asset class.
We are underweight on government bonds due to the unfavourable risk/reward imbalance.
We prefer short maturities, whether in Europe (but with the risk of normalisation of the ECB’s accommodative monetary policy) or the United States (with the Fed’s ongoing normalisation of monetary policy).
For the equity component:
We recently adopted a neutral stance on the Europe region, despite sustained economic activity. The latest indicators show signs that the economy is running out of steam, while doubts are looming (normalisation by the ECB, political crisis in Italy, protectionist policies across the world).
As regards the other major regions: in the United States, growth is healthy but already priced in with stretched valuations. In Japan, business prospects are somewhat brighter, but valuations remain high and the strong yen is an issue. Lastly, in emerging markets, economic prospects are looking favourable again but growth has yet to accelerate.
In the current money market environment, with yield levels close to the zero lower-bound, CMB has put into place an investment solution named Dual Currency Deposit, which targets international clients that are used to managing their portfolios in a variety of currencies, so as to propose investment solutions with more attractive yields for a given level of risk. Given the exclusivity of this product, reserved for clients aware of the risks involved, the minimum subscription amount has been fixed at 400.000 EUR or equivalent in the currencies from the main developed countries, for a time-span of three to six months.
The Dual Currency Deposit (DCD) is a term deposit coupled with the sale of a Call option of the deposit currency against the alternative currency. This Call option sale provides a yield enhancement of the term deposit through the collection of the premium when setting up the DCD. On the other hand, this Call option sale puts the deposit amount at risk of conversion into the alternative currency at maturity. At maturity, the reimbursement circumstances are conditioned by the evolution of the exchange rate between the two currencies, depending on the contractual characteristics of the currency option sold, including the strike price which will determine the repayment currency of the term deposit. If the conversion rate is not reached at the reference date, the currency option is nil and the deposit amount will be reimbursed in the investment currency. If the conversion rate is reached or crossed (and therefore, if the alternative currency has weakened against the investment currency) on the reference date, then the reimbursed deposit amount is converted automatically into the alternative currency at the conversion rate.
The international clients targeted by this placement can therefore enjoy higher yields with respect to current money market conditions, provided the determined alternative currency does not weaken beyond the intended conversion rate.
A detailed fact sheet can be consulted under this link: Fact Sheet Dual Currency Note
This fund, the Monaco Convertible Bond Europe, enables investors to derive a participation in any rise in the European equity markets via the convertible option embedded in such bonds, while still enjoying downside protection, in the cas of equity weakness, via the bond element.