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From Europe to the United States, in an election year, political priorities will be determined by opinion polls, while financial markets await signs of substantive changes in central bank monetary policy. In Europe, the shift toward anti-establishment right-wing parties after last week’s elections is set to change political direction, prioritizing national security and border controls over green transformation.
Green finance in trouble
After the Greens’ defeat in parliament, “public spending on green initiatives is likely to decrease during the legislative period, while public spending on defense and border control will increase,” with implications for securities related to those sectors, according to economists from Swiss investment firm Vontobel.
However, all is not lost: “If some of these green transition projects are modified or postponed, a complete reversal is unlikely”, explains Jean-Louis Nakamura, head of the Vontobel Conviction Equities boutique, during a presentation on the market outlook by the asset management company. There is still 400 billion euros of funding for European projects until 2030 through non-repayable credit lines and loans, focusing on energy efficiency, green energy, sustainable real estate renovation, electric vehicles.
Focus on real interest rates
While we wait for signals on the next political moves from the European parties, financial markets are scrutinizing today’s board meeting of the Federal Reserve, at the end of which no decision on interest rates is expected. But it is only a matter of time: “A rate cut is coming, the Fed wants to ensure that the inflation trend moves towards the target of 2%”, explains Mondher Bettaieb-Loriot, head of corporate bonds at Vontobel, who expects three rate cuts in 2020 from the US central bank (the first in September), just a few months after the ECB’s statement: “Signs of an end to restrictive monetary policy are clear. The Fed is concerned about the trend in core inflation, the main items of which, from rents to insurance, are trending downwards. If you look at the real interest rate, there is enough wiggle room, about 250 basis points of reductions can be made”, adds the manager.
AT1 key in ripresa
The economic situation on both sides of the Atlantic remains reassuring, with recession risks in both Europe and the US seemingly averted following the corona crisis and the energy crisis triggered by the war in Ukraine. As inflation (net of sudden exogenous shocks) is steadily falling, credit investments will continue to perform positively, even if total returns are lower than in 2023. “Financial bonds of banks and insurance companies offer higher spreads than corporate bonds, all the way from high-grade bonds to Tier 2 and up to AT1,” explains Eoin Walsh, portfolio manager at TwentyFour Asset Management, a subsidiary of Vontobel. AT1s (Additional Tier 1) are also performing well, having returned to managers’ portfolios after the Credit Suisse crisis, when they were reset to zero to save Swiss banks.
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