Fynsa
During the first quarter of the year, financial markets maintained the momentum with which they ended 2023, The financial markets maintained the momentum with which they ended 2023, driven by better global activity figures and positive corporate results, which have offset interest rates that remain high by historical standards.
Indeed, 10-year U.S. Treasury rates rose by nearly 35 bps in 1Q24amid a market "recalibration" of the Fed's rate cut expectations for 2024 from 6 expected cuts by the end of 2023 to only 3, which is more in line with the Fed's base case.
This has impacted fixed income, which closed the quarter with losses of close to 1%.
With inflation showing no further progress in 1Q24, a labor market that remains strong, and rising energy prices - given the backdrop of heightened geopolitical risks - we believe that risks have been leaning toward less monetary easing by the Fed. we believe the risks have been tilting toward less monetary easing by the Fed.
This could continue to put some upward pressure on sovereign rates, although we believe the risks are more balanced than when we started the year, and we maintain our conviction that this year should be a positive one for fixed income, with historically attractive starting rate levels.
The focus on improving quality should allow investors to build resilient portfolios without giving up upside potential.
Higher interest rates did not prevent the international equity portfolio from returning close to 7%, given the improved dynamics of corporate results.
We maintain a more balanced global strategy, to address the high concentration of the U.S. market and unattractive valuations.
Locally, we have started the year with upside surprises in growth, but also in inflation. The process of monetary normalization by the Central Bank of Chile has followed its budgeted course, with the TPM already at 6.5%.
However, local economic surprises and the delay in the process of monetary normalization in the U.S. However, local economic surprises and the delay in the process of monetary normalization in the U.S. are likely to result in a slowdown in the process of local TPM cuts for the rest of the year, and convergence to a neutral rate (4.0%) would be delayed to 2025.
That said, we have concluded that the optimal duration in terms of capital preservation is 1.5-2 years. A duration of around 2 years should be the "natural recipient" of the OW in IIF that the market currently exhibits. On the other hand, we continue to expect more inflation than the market, so we maintain a portfolio with high exposure to instruments in UF and of very good credit quality (AA), mainly invested in bank bonds, deposits to which we have been gradually adding corporate bonds.
This combination has delivered returns in the tone of 2.5% in 1Q24, different has been the case for longer duration strategies, which continue to underperform and show higher volatility.
Local equities also had a good quarter (+7.2%), given the good performance of international markets, an improvement in expectations about China and greater monetary easing at the local level.
At the sector level, we maintain a stronger conviction in banks and commodities. Going forward, we continue to believe that Chilean equities offer an attractive risk-return trade-off, with a friendlier interest rate environment going forward, improving corporate earnings and highly discounted valuations.
Finally, regarding the exchange rate, although our models continue to point to an undervalued peso, we must also recognize that it has become "more fragile" and speculative. We are in a world where carry matters a lot, which continues to leave the peso vulnerable to external flows that use the peso as a funding currency against other higher yielding currencies in the region, especially considering that the Central Bank of Chile will continue to cut interest rates more aggressively against both Latam and DM bonds.
For more information, we invite you to review the following report.
