"Investing in financial markets requires calm, and even more so when there’s a lot of volatility."
In the section "MAPFRE AM's Monthly Interview", David Iturralde, head of fixed income at MAPFRE AM, discusses the opportunities in the corporate and government bond market. To try to minimize the negative effect of a fateful 2022 on portfolios, short durations have been maintained in all funds.
- You’re the Fixed Income Manager at MAPFRE AM, can you tell us about your duties at the company?
Mainly, coordinating the department to allocate resources to different jobs. The most important: analysis of the macro and microenvironment, the basis for making management decisions. I also monitor fund performance with respect to their references, analyze the different scenarios with which we work, adjusting them when making management decisions.
- You have been with the team since 2006, what is your assessment since then?
The overview has been clearly positive, there are always strong and weak points, projects that don't get finished or that don’t turn out as expected, but overall, I must thank MAPFRE for the opportunity to develop as a professional within the company and for the trust placed in me. Moreover, it’s been a very interesting period from a financial market point of view: the Lehman Brothers bankruptcy, the debt crisis, the eurozone crisis, Central Banks’ actions... there’s been no time to feel bored, really.
- 2022 has been one of the worst years for fixed income in living memory—why is this? What lessons do you draw from this exercise?
We must remember that we are coming from a period of more than ten years of Central Bank intervention due to the debt crisis of 2010. This crisis was based on a crisis of confidence, which is essential in economic transactions and, more specifically in Europe, the viability of the Euro as a project was called into question. In this context, Central Banks have been intervening in the economy to get it back on track, bringing interest rates in Europe into even negative territory. This situation has been abruptly reversed, with a very rapid and abrupt increase in inflation, which has led to the end of the free open bar of money that the Central Banks placed at the disposal of the various economic actors. Thus, the market has had to quickly price all assets in this new situation and, as a result, we've seen falls of around 10% in European equities and more than 18% in European fixed income. However, an investor who had been invested in the Fondmapfre Renta Flexible would have reduced these losses, with a return of -6.68%.
- What advice would you give to a conservative investor who incurred these losses the previous year?
Investing in financial markets requires calm, and even more so in times of high volatility. The clearest example was seen with the impact of COVID, where the back and forth movement was very abrupt. Someone who was nervous at the beginning of the crisis would have made the wrong decision. Investments should be made with a long-term objective and not be influenced by short-term activity.
- This year, however, has started out strongly, do you think that fixed income has regained its status as a safe haven asset? What are your forecasts for 2023?
We're in a market situation where volatility is going to be the norm. In addition, Central Banks are trying to normalize their monetary policies, at a time when they also have to act to contain inflation. I think we may still see interest rate hikes, although not to the same magnitude as in 2022, as long as the economy does not go into recession.
- Central Banks are in the midst of a period of aggressive rate hikes, how does this affect bonds and what is your strategy for funds to adapt to this new environment?
Like other assets, bonds have reflected the new market conditions, growth and inflation expectations negatively in their price, as well as monetary policy adjustments by Central Banks. We've kept short-term bonds in all our funds, to try to minimize this negative effect on the portfolios, trying to take advantage of the opportunities offered by the market at any given moment.
- On the corporate bond side, which sectors would you recommend and with which rating? The same with government bonds...
This year, we’ll continue to have inflation levels above Central Bank targets, which will force Central Banks to maintain a restrictive monetary policy. In addition, government debt issuance won't have Central Banks as the last resort buyer they have been, so credit, corporate debt, could still suffer during the first half of the year as it has to compete for investors. Therefore, I would look at defensive sectors, always within investment grade, that can face a scenario of low growth and rising commodity prices with the capacity to pass it on to the end consumer. These would be sectors such as energy, healthcare and companies involved in services like electricity, gas, water, etc.
In the same vein, I would focus on semi-hard core European countries (France or Belgium), which offer a bit more attractiveness compared to hard core countries such as Germany or the Netherlands, for example. It would avoid having too much exposure to the periphery, as these countries will be immersed, on the one hand, in higher debt issuance to finance their structural imbalances, as well as measures to mitigate the effects of the energy crisis, while maintaining their budget deficits, and on the other hand, in a period of low growth.
- Are you a fan of any fixed income guru? Could you recommend any books related to the subject?
I’m certainly not a fan of gurus, but I do like to follow the opinions of Geraldine Sundstrom, CEO and portfolio manager at PIMCO, which I believe is a reference in fixed income.
Regarding the book, I would recommend The Alchemists, by Neil Irwin, which explains very well the whole process we lived through during the debt crisis.
Hobbies: I like cycling around El Pardo or the Madrid mountain range, although unfortunately, lately I don’t do it much.
A dish: I like codfish very much, if it’s fresh. Also a good T-bone steak, so a cider house menu would be a great combination. Either one, but always in good company.
A city/country: Madrid: I like this city very when I have time to enjoy it. Outside of Spain, I’d certainly choose Amsterdam. I also like Italy and Portugal very much, I try to go now and then, they both have cultures very similar to ours.
A band: I really like Los Suaves, Extremoduro, Loquillo, and Sabina, who writes very good lyrics. Outside of the national scene, I'd go with AC/DC, Metallic or Guns ‘n Roses.