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A-rated manager: how credit can win from digitalisation

A-rated manager: how credit can win from digitalisation

Digitalisation is a non-reversible trend which is hugely driving the growth of cash held by corporates, Vontobel’s head of corporate bonds has said.

Citywire A-rated Mondher Bettaieb, who runs the Vontobel Fund – EUR Corporate Bond Mid Yield fund, said the problem for large tech and digital-focused firms has become what to do with all the cash they have piled up.

'Currently, firms are sitting on large piles of a cash and as quick as they can invest it, more and more comes flooding in,' he told Citywire Selector.

'Digitalisation is a trend that is happening in many industries, however, and I think the whole corporate bond market is benefitting. Because when cash levels start to improve, the credit part and the fundamentals of corporates also improve.

'The growth of the digital economy requires less investments and fewer employees, allowing companies to save more.'

Bettaieb said in 2016 The Economist found that digital groups such as Microsoft, Facebook, Alphabet and Apple had around $300 billion in net cash, with the figure estimated to climb to $700 billion by 2020.

'Cash held in a bank is on the bank’s balance sheet, but securities are not. This realisation resulted in corporates shifting cash into bonds as a precaution.'

Despite Bettaieb having said it would be difficult to position the corporate bond portfolio to benefit from the ongoing trend, he highlighted the banking industry as a sector that could benefit.

'An industry which is really stepping up its digitalisation efforts is the banking industry. It's using digitalisation to cut costs quite a lot, technological developments mean the industry is making digitalised products widely available for the consumer.

'The banking industry will benefit from this trend and as a result, the credit worthiness of banks might be sustained or even improved, you could make the case that you should be overweight banking, so to speak.’

Caught in a trap

Bettaieb said digitalisation inadvertently caused the world to be caught in a negative loop, which is also partly driven by central bank intervention.

‘Digitalisation is inflicting a lot of pain on labour and wages, which is why we see little wage growth in the US and Europe, with a lot of jobs disappearing.

‘This is especially in the US which used to employ many manufacturing functions, which are now either being digitalised or robotised. People will lose their jobs, and when you lose your job your spending power diminishes.’

With a minimum of 67% of the fund invested in corporate bonds rated between A+ and BBB and a maximum of 25% invested in corporates rated between BB+ and BB-, Bettaieb said the asset class will benefit from digitalisation, as corporate companies will be able to hire workers for a cheaper rate.

‘Companies will be able to dictate lower wages. Robotics and digitalisation will increase competition for products, meaning many corporates will lose pricing power, resulting in small mark-ups that contribute towards more inflation.

‘People tend to forget that a whole pool of workers will become available due to the digitalisation phenomenon, and there will be a lot of applicants in the employment market. Corporates are in a good position to hire on the cheap side due to the amount of job destruction.’

Over the three years to the end of July 2017, the Vontobel Fund EUR Corporate Bond Mid Yield fund returned 10.48% in euro terms. This compares with a 8.93% rise by its Citywire-assigned benchmark, the BofA Merrill Lynch A-BBB Euro Corporate TR EUR, over the same time period.

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