5 questions for Jakob Reithmann, MEAG MUNICH ERGO Kapitalanlagegesellschaft mbH

As an investor largely focused on fixed-income securities, MEAG has of course also felt the effects of this historic rise in interest rates. However, as a group, we were already cautiously positioned quite early in the year, so that we were less affected in relative terms. Looking forward, however, this year has significantly increased the attractiveness of the asset class, and our customers can see that too. After all, when was the last time you were able to earn returns in excess of 2,5% with a defensive AAA-rated portfolio? And the investment landscape has also changed for opportunistic investors, with European corporate bonds currently promising higher returns than the European equity market.

In principle, MEAG has been an active investor in the global covered bond market for many years. And since 2022 was not only a year of massive interest rate increases, but also of very high Pfandbrief new issue volumes, the primary market in particular offered a large number of attractive investment opportunities this year. As a result of the high volume as well as the gradual withdrawal of the ECB, it was possible to generate an additional 5-10bp in yields on average with these securities.

Overall, we are probably in for a positive but volatile capital market year, where income, not capital gains, are responsible for most of an investor’s total return. In this context, we see short-dated covered bonds in particular as an attractive underlying investment for our fixed income portfolios, as they promise almost identical returns as longer-dated paper despite lower interest rate and spread sensitivities. Regionally, we prefer investments in core European markets to those in countries with a comparatively higher share of floating-rate mortgages.

The year 2023 should be challenging for both the eurozone in general and Germany in particular. For example, we not only expect the recession to start this winter, but also to continue into next year, when the full impact of the sharp rise in energy prices, among other things, will become apparent. And since China will only be able to provide weak economic impetus, the ECB should continue to pursue a restrictive monetary policy despite slightly declining inflation rates, and a number of geopolitical dangers are still lurking on the horizon, we see little chance of positive surprises.

In the main scenario outlined above, we see inflation rates in the eurozone in particular remaining well above the ECB’s 2% target next year, which should tend to lead to higher yields. However, since, as discussed earlier, the real estate markets in the core European countries in particular should be significantly less affected by the rise in interest rates, the overall rise in yields should be moderate. Specifically, we expect yields on medium-term Pfandbriefe to rise to levels between 2.75% and 3.25%.