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Mirabaud’s Luis: why we avoid all types of European bonds

Mirabaud’s Luis: why we avoid all types of European bonds

The European bond market is now completley warped by ECB action and the underlying risks no longer justify high exposure.

That is the view of Mirabaud’s Fatima Luis, who runs the Mirabaud Global Strategic Bond fund alongside Andrew Lake.

Speaking to Citywire Switzerland's sister website Citywire Selector, Luis said her team had added to the short duration tilt of the portfolio since the beginning of the year due to perceptions of continued stimulus amid a deflationary environment.

'Europe has been pricing in deflation for a long time and QE forever. For long duration bonds, we are really at risk, as the oil price will stabilise then increase.'

'PMIs (purchasing manager’s index) throughout Europe have been pretty decent, even though inflation is still well below target, bonds, especially European-denominated bonds, are at great risk.'

Luis said the team increased the short in European bonds over the summer and started to protect interest rates, as well as becoming focused on the credit side of the portfolio.

'We have stayed away from all European bonds, whether it be sovereign, investment or high yield, we didn’t see much value there, and we felt valuations were purely technical and driven by ECB action.

'We felt if inflation started to pick up then euro-denominated bonds would suffer, which is exactly what we have seen.'

Upping energy

Luis currently has 11% of the fund allocated to the energy sector, a position she said the team has been building on since the beginning of the year.

'We believe the energy sector will do well for us in 2017. At the beginning of the year we had 7% allocated to energy, we now have over 11%. Given the recent OPEC deal, we think it’s a sector that will clearly benefit the fund.

'One of our largest holdings in the space is a natural gas terminal, but we are mainly looking at US producers. We believe a move up in the oil price will definitely benefit energy sector bonds.'

The Mirabaud – Global Strategic Bond fund returned 6.81% in US dollar terms over the three years to the end of November 2016. This compares with a 0.42% rise by its Citywire-assigned benchmark, the BofA Merrill Lynch Global Broad Market TR, over the same time period.

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