Investment | 21 October, 2019

Protect the profitability: discover why our clients come first

Alberto Villasán Investment and Markets Director

How to invest in an economic debt environment

At present, most economies, both developed and also emerging market, are reporting excessive debt levels compared to the past. The amount of debt in the US economy, which in turn sets the pace of the world economy, stands at almost four time the wealth this country produces (measured by it gross domestic product).

We present a success story. Find out how our fixed income portfolio managers – with our clients as the main focus – made the best financial decisions to protect the profitability on their portfolios.

Almost two years ago, our fixed income portfolio manager – Joaquin Gonzalez – published an article on our website entitled “How to invest in an economic debt environment”

At that time, the US Federal Reserve continued increasing interest rates and the bonds of investment-grade rated companies paid returns close to 5% annually on a 10-year bond.

What Joaquin embodied in his article was that this situation was unsustainable and that both long-term rates (the yield delivered by US Government Treasury bonds) and short-term rates (official rates and bank deposits) should fall, or at least stop climbing structurally, due to high economic indebtedness. And that, therefore, investment-grade long-term corporate bonds were one of the best opportunities to invest in recent times.

A year and a half later, we can see how reality has proved our expert right and many of our clients have benefited from this idea, accumulating double-digit profitability during 2019 and, most importantly, ensuring profitability in their assets well above long-term inflation.

At this point, we must say that the basics of that article remain intact and that it is very likely that the rate cuts initiated by the Fed will continue structurally, in response to the high indebtedness and fragile economic environment in which we find ourselves.

That is why we, as investors, should change our mentality and understand that the environment of structurally low reference rates and official interest rates close to zero, or even negative, will be the usual environment in the medium and long term.

Fortunately, at BBVA Switzerland we have been ahead of this situation for years and have incorporated it into the structure of our clients’ portfolios. If you want more information, do not hesitate to contact your investment manager.

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