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AA-rated Cataldo goes long on European banks

AA-rated Cataldo goes long on European banks

Opec's recent decision to cut oil production is a game changer and is likely to put a floor under the oil price, according to Pioneer’s head of absolute return multi-strategy, Davide Cataldo.

Speaking to Citywire Selector, Citywire AA-rated Cataldo, who runs the Pioneer Funds - Multi-Strategy Growth fund, said he has added to banks and energy due to rising inflation expectations.

'The re-balancing of supply and demand within the oil sector has been dominated by cuts to US production, as a result Opec market share has gained – as desired,' he said.

'On the demand front, emerging market economies, which are more oil dependent than developed markets, are signalling better PMI trends.'

'We expect demand and supply will be more balanced in the future. Investor positioning in the energy sector is low. We have increased our energy exposure mainly through futures on the EMINI S&P ENERGY and STOXX 600 OIL indices.'

Elsewhere, Cataldo said fundamentals remain weak and the European banking sector has been adversely affected by the ECB’s negative interest rate policy, but he said there are reasons to be positive.

'Earnings remain positive, even if expectations are falling but are still dependent on existing loans where margins are higher. We are tactically more positive on the sector based on investor positioning and short-term catalysts.'

Cataldo has increased exposure to banks through futures, having already had a long US financials vs a short EU banks strategy in place.

'We recently converted the EU banks position from short to long, adding to our total financials exposure,' he said.

'US financials had a good quarter from an EPS perspective and we expect the sector to continue to outperform the US market, but EU banks may have more upside in the short term.'

While the fund has a net short on financial equities, it has 16.9% exposure to financial bonds. Despite adding to energy exposure, he remains short on the equity investments in this sector.

Limitations

Despite many investors championing Venezuela, Cataldo said he is currently avoiding the country due to its unpredictable political situation.

'We have very few limits regarding countries, although there are certain countries subject to sanctions that we will not invest in such as North Korea, Iran, and Syria.

'At the moment we are also avoiding Venezuela to better understand how the political situation will evolve and whether there will be a technical default of its debt.

'However, our stance may shift in the future should the political and economic situation change, similar to what happened in Argentina,' he said.

Elsewhere, Cataldo currently has 20.7% of the fund allocated to Japanese government bonds but said the position is not a call on Japan, but a call on its inflation.

‘Our long position in Japanese government bonds is concentrated on the 10-year inflation-linked bond, which we hedge through the 10 year JGB future. This provides us with a pure ‘break-even’ inflation exposure.’

'We are bullish on global inflation expectations, which is one of our strongest conviction ideas, and Japan is but one component of this global inflation exposure. We believe the market remains too bearish on inflation in Japan, and inflation expectations are priced too cheaply.'

The Pioneer Funds Multi-Strategy Growth fund returned 20.8% over the three years to the end of September 2016, in the multi-strategy category. This compares with a sector average of 6.3% over the same time period.

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