Sustainable bonds continue to offer “interesting investment opportunities” despite last year proving challenging for the market, says AXA Investment Managers.
The investment group said 2023 may be the year of the bond market revival, driven by a slowdown in headline inflation, better-than-expected growth and central banks’ monetary tightening coming to an end.
In its market commentary, Axa said that despite the volatility of 2022, green, social and sustainability bonds (GSS) bonds registered $606 billion of new issuances, largely driven by the green bond market. Meanwhile, sovereign issuance continued to pick up, with new countries including Austria and Canada issuing their first green bonds.
Axa said: “This reflects not only the credibility of green bonds when it comes to supporting the financing needs of the Net Zero transition but also that every sector is progressively investing in such a transition. Looking ahead, there are reasons to believe that this sector diversification should also be accompanied with greater regional diversification.”
The rebound in yield levels at the end of 2022 has also helped valuations to look increasingly attractive. While the short term picture remains uncertain amid inflation and monetary tightening cycle, the long term picture looks more compelling for the bond market, according to Axa.
“We believe that some of the factors that explained the underperformance of the GSS universe compared to the conventional universe in 2022 will reverse in 2023. The GSS universe currently enjoys an attractive yield pick-up compared to the conventional universe and looks better positioned to benefit from a decline in yields and the compression of credit spreads.”
Finally, tougher regulatory pressures and increasing climate and social awareness is expected to create greater interest in the asset class.
The transition to net zero will require huge investment over the coming years, with one study showing it would need an extra $3.5 trillion a year in capital spending on physical assets for energy and land use systems to succeed by 2050.
Meanwhile, strikes and cost-of-living related challenges are exacerbating inequalities across populations, with low income households on the front line when it comes to bearing the cost of both climate change disasters and the transition to net zero. With this in mind, Axa said there could be a resurgence in social bonds over the coming 12 months.
However, the investment manager cautioned that investors should “nevertheless remain cautious” when investing in sustainable bonds, noting that the crux is the ability of asset managers to invest in meaningful projects from credible issues through a strong analysis.
