The unwinding of the European Central Bank’s bond-buying programme is destined to cause a taper tantrum-like event and investors should be preparing now.
That is according to Rose Ouahba, head of bonds at Carmignac, who reiterated concerns that the market simply isn’t ready for the end of accommodative policy.
'At the moment the central banks, especially the ECB, have put the market into a dangerous position,' she told Citywire Selector.
'Which is to say "so far so good" and expect that the implementation of the QE will continue and therefore volatility is very low,’ Ouahba added.
‘Therefore the Patrimoine portfolio is quite conservative and we are not in the camp that believe the ECB will successfully implement tapering without shocking the market. We do think that there is a very serious risk that we would have some shock at some stage.’
Ouahba, who co-manages the Carmignac Patrimoine fund with Edouard Carmignac, said the combination of low carry and low volatility had encouraged investors to maintain long exposure to illiquid markets.
'We know that at some stage they will unwind the tremendous monetary accommodation and we find that very dangerous.
'That is why want to stay on the cautious stance and stay negative duration and reduce our exposure to illiquid assets such as to credit,’ Ouahba said.
In terms of positioning, Ouahba is taking a vigilant stance regarding future interest rate rises and has increased exposure to peripheral Europe.
‘We still very cautious on German bunds, so we have kept our short duration there. The exposure towards the European countries is negative so we are net short there.
'In the mix we have increased our peripheral exposure and decreased our exposure to German bunds, as a matter of risk reward, but this is still us preparing for a taper tantrum,’ Ouahba said.
Elsewhere, Ouahba said she is taking out insurance against volatility. 'We have also been buying some protection in case of a large spike in the volatility of rates and we have also bought some options to hedge against a spike in volatility.’
Over three years to the end of July 2017 the Carmignac Patrimoine fund returned 12.43% in euro terms.
This compares to a rise of 25.98% by its Citywire-assigned benchmark, the LCI MSCI AC World TR EUR/Citi WGBI TR EUR (50:50), over the same time frame.