In January, the spread on the iBoxx Euro Corporate Index tightened by 12 basis points to 160 basis points above the government bond curve. The index earned an absolute return of 1.10%. German 10-year government bond yields closed January at 0.15%, 9 basis points lower than at the end of December.

There are increasing signs that global economic growth is weakening, particularly in Europe and in China. Examples include the economic recession in Italy, the falling IFO business climate index in Germany and Chinese car sales that in December were down 16% compared to the year earlier period. A multitude of factors seems to be responsible for the slowdown in growth, including the uncertainty surrounding Brexit, the difficult trade relations between the US and China and the impact of monetary tightening.

In spite of the deteriorating economic conditions, sentiment on the European corporate bond market underwent an almost total reversal from the negativity that dominated the fourth quarter of 2018. This U-turn in investor sentiment seems to be mainly driven by expectations that the US central bank will pursue a much less aggressive monetary policy in 2019 than had initially been feared. In December last year, Fed chairman Jay Powell claimed that the reduction in the Fed’s balance sheet was on automatic pilot and that further gradual increases in interest rates were likely. Yet Powell adopted a more nuanced tone in January. The Fed now intends to be patient on further interest rate hikes and the reduction of the balance sheet will now depend on how economic data evolve.

Subordinated bonds issued by insurers and non-financial companies performed better than average in January. At sector level, real estate and industrial goods were the star performers. Spreads on bonds issued by US conglomerate General Electric tightened by 30 to 80 basis points after the company announced additional measures to reduce its debt at an accelerated pace and improve its liquidity position.

The supply of new bonds amounted to EUR50 billion in January, about 2% up on a year earlier. Non-financial sector companies issued EUR30 billion in new bonds last month, while financial sector companies issued EUR20 billion in bonds.

The Fund aims to avoid investments that act in breach with the VFI Richtlijn Financieel Beheer Goede Doelen (VFI Directive Financial Management Charities). De VFI Directive consists of basic guidelines and additional guidelines. The basic guideline advises institutions to investigate investments on violations of among others human rights, corruption and protection of the environment. The additional guideline is developed for organisations that want to apply stricter sustainability criteria in the investment policy. This directive includes further exclusions of companies involved in for example nuclear power, alcohol, tobacco, laboratory animals, adult entertainment and genetic modification. Each quarter, the investment universe is screened for violation of the VFI Directive. This screening is conducted based on the MSCI ESG Research database.

During the month, the portfolio’s sensitivity to market trends varied between 91% and 101%. The portfolio therefore held an underweight to neutral positioning in terms of market risk.

Our positioning in the telecom, banking and insurance sectors performed relatively well in January. In contrast, our positioning in the infrastructure, auto and utilities sectors contributed negatively. Our liquidity position (in the shape of cash and government bonds) had a neutral impact.

At individual company level there were positive contributions from the overweights in Telefonica, OMV, Groupe La Poste, Caixabank and Solvay. In contrast, the overweights in Enexis and Equinor, as well as the underweights in General Electric (excluded), Volkswagen (excluded) and Atlantia (excluded) made a negative contribution.

In January, the Fund participated in new bond issues by ING, Elia, Banque Federative du Credit Mutuel, BPCE, ABN AMRO, Deutsche Bahn, Bank of New Zealand, Fresenius, Vonovia, Argenta Spaarbank, Smurfit Kappa, Telefonica and Digital Realty Trust.

The bond issues by Digital Realty Trust and Telefonica were “green bonds”. US data centre company Digital Realty Trust will use the proceeds to invest in sustainable energy projects, to improve its energy efficiency and make its company premises more sustainable. Telefonica, on the other hand, will use the proceeds to replace its copper telecom network with a fibre optic network. In doing so, Telefonica expects to achieve energy savings of 85% per user.

Outlook
The material tightening of spreads since the start of this year has led to a decrease in the number of interesting investment opportunities. Combined with the multiple signs of a slowdown in global economic growth and our forecast that the supply of new bonds will increase significantly in the next few months as a result of the attractive rates at which companies can obtain funding, we have decided to reduce the level of risk in the portfolio.