Generali Euro is a short-term debt sub-fund. It is currently the only sub-fund on the Polish market denominated in EUR – all payments, withdrawals and valuations are made only in this currency. What is more, all investments of the sub-fund are also made in EUR, which significantly reduces the risk of changes in exchange rates. In accordance with its investment policy, Generali Euro invests both in bonds issued and guaranteed by national governments, as well as corporate bonds and covered bonds. The short-term nature of the sub-fund means that the volatility resulting from changes in the level of profitability is limited.
A diversified “European”
The basis for the structure of this sub-fund is a wide diversification – both geographical and sectoral. In terms of geographical exposure, almost the entire portfolio is located in Europe (with a small admixture of issuers from the USA) and is spread over 3 regions:
countries from Central and Eastern Europe – bonds of selected issuers from almost all EU countries in our region. This part of the portfolio has a similarly high profitability as Polish issuers, and at the same time allows for much wider diversification,
Western Europe – mainly short-term treasury bills from France and Germany, which primarily provide a substantial liquidity cushion with very limited credit risk.
As at the date of the material, the subfund’s portfolio includes over 90 different series of bonds, issued by over 50 issuers from several different countries.
Government and corporate securities
In terms of the type of issuers, sub-fund deposits can also be divided into 3 main categories:
government bonds and bonds guaranteed by European governments (both short-term treasury bills and longer bonds), which are characterized by the lowest credit risk,
corporate bonds – a diversified portfolio of almost 40 different issuers, mainly from Polish and CEE countries, which has the largest contribution to the generated result,
covered bonds – mortgage-backed debt securities with very high credit quality and yields above government bonds, are also securities characterized by a high level of security and low investment risk.
Relatively low sensitivity to changes in interest rates
The interest rate risk of the portfolio is limited – in accordance with the Articles of Association, the modified duration ratio of the debt part of the subfund’s portfolio, determining the sensitivity to interest rate fluctuations, may not exceed level 3, but in practice significantly lower values are maintained. In order to mitigate interest rate risk, the sub-fund uses derivatives, especially futures contracts for German government bonds.
Credit risk in focus
The subfund’s credit risk is strictly controlled. The portfolio is broadly diversified – excluding government bonds and covered bonds (which inherently have limited credit risk), exposures to individual issuers are relatively small, occasionally exceeding 2% of the portfolio. The credit rating of most of the portfolio is the same or better than that of Polish (at least A-). On the other hand, there are only a few issuers with a BB+ rating or worse (i.e. the so-called high yield) and they do not exceed 10% of the portfolio in total. Credit risk is therefore at a relatively low level. Importantly, the liquidity of the bond market denominated in EUR is incomparably better than in the case of bonds denominated in PLN, which allows for a quick response in the event of a deterioration in the credit quality of any of the issuers.
Impact of the current market situation on Generali Euro and prospects for 2025
The market situation last year was extremely favorable for Generali Euro – since September 2023, ECB interest rates have been at the highest level in their history and despite a series of 4 cuts, they still remained relatively high. At the same time, the market was already pricing in further reductions, which resulted in a decrease in yields (increase in prices) of securities with a relatively longer maturity. These two factors – high interest rates at the short end of the curve and an increase in bond prices from the middle and longer end of the curve – allowed us to achieve the best annual return in the history of the subfund, which in 2024 amounted to as much as 5.45%.
What’s ahead?
In the horizon of the next few quarters, the outlook for Generali Euro is still positive, although we are aware that last year’s result would be difficult to repeat. Our forecasts for this year indicate a result of 2-3%, which should be supported by the still relatively high current profitability of the portfolio (currently almost 3.5%, although it will decrease over time).
As far as the market environment is concerned, attention should be paid primarily to the ongoing cycle of monetary policy easing by the ECB. Currently, the deposit rate is 3% (compared to 4% at the end of 2023 and the first half of 2024), which is quite high by European standards – the rate was higher than now only in 2000-2001, briefly in 2008 and in 2023-2024. According to economists’ forecasts and market valuations, in the first half of the year we can expect another 3-4 cuts, which should bring the rate to a more or less neutral level of nearly 2%, where it would remain in the medium term. At the longer end of the curve, we are currently dealing with relatively high yields – in the area of 2.5% for the German 10-year bond. Taking into account the expected interest rate cuts and looking at the weakness of the European economy, and especially the German economy, which has been persisting for several years, it seems that there is some room for a decrease in yields (an increase in bond prices). At the same time, credit spreads have narrowed very clearly over the past year, but in Poland and more broadly in Central Europe, they still remain at elevated levels. This means that bonds from our region should still give significantly higher rates of return than in Western Europe or the USA. In such an environment, we expect a result of 2-3% in 2025 to be very realistic, with the first half of the year promising to be much better than the second.
Risk factors
On the risk side, it is important to remember primarily about the geopolitical situation – the ongoing war in Ukraine or the possibility of a new conflict. The second factor that could negatively affect the market is the risk of escalation of trade wars initiated by tariffs imposed on other countries by Donald Trump. In an extreme scenario, this could lead to a significant increase in global inflation, and thus translate into an increase in bond yields. These credit spreads could in turn widen in the event of a sharp economic slowdown and a prolonged recession.
Taking into account the market situation outlined above and the main risks indicated, we believe that the Generali Euro subfund has a great potential in the current situation to generate rates of return significantly higher than the interest rates on foreign currency deposits offered in Polish banks. In this context, investing in Generali Euro seems attractive especially for those people or companies that have or would like to build savings in a stable foreign currency, which is undoubtedly the euro.Generali Euro is a short-term debt sub-fund. It is currently the only sub-fund on the Polish market denominated in EUR – all payments, withdrawals and valuations are made only in this currency. What is more, all investments of the sub-fund are also made in EUR, which significantly reduces the risk of changes in exchange rates. In accordance with its investment policy, Generali Euro invests both in bonds issued and guaranteed by national governments, as well as corporate bonds and covered bonds. The short-term nature of the sub-fund means that the volatility resulting from changes in the level of profitability is limited.
A diversified “European”
The basis for the structure of this sub-fund is a wide diversification – both geographical and sectoral. In terms of geographical exposure, almost the entire portfolio is located in Europe (with a small admixture of issuers from the USA) and is spread over 3 regions:
Poland – the market we know best and which generates high rates of return,
countries from Central and Eastern Europe – bonds of selected issuers from almost all EU countries in our region. This part of the portfolio has a similarly high profitability as Polish issuers, and at the same time allows for much wider diversification,
Western Europe – mainly short-term treasury bills from France and Germany, which primarily provide a substantial liquidity cushion with very limited credit risk.
As at the date of the material, the subfund’s portfolio includes over 90 different series of bonds, issued by over 50 issuers from several different countries.
Government and corporate securities
In terms of the type of issuers, sub-fund deposits can also be divided into 3 main categories:
government bonds and bonds guaranteed by European governments (both short-term treasury bills and longer bonds), which are characterized by the lowest credit risk,
corporate bonds – a diversified portfolio of almost 40 different issuers, mainly from Polish and CEE countries, which has the largest contribution to the generated result,
covered bonds – mortgage-backed debt securities with very high credit quality and yields above government bonds, are also securities characterized by a high level of security and low investment risk.
Relatively low sensitivity to changes in interest rates
The interest rate risk of the portfolio is limited – in accordance with the Articles of Association, the modified duration ratio of the debt part of the subfund’s portfolio, determining the sensitivity to interest rate fluctuations, may not exceed level 3, but in practice significantly lower values are maintained. In order to mitigate interest rate risk, the sub-fund uses derivatives, especially futures contracts for German government bonds.
Credit risk in focus
The subfund’s credit risk is strictly controlled. The portfolio is broadly diversified – excluding government bonds and covered bonds (which inherently have limited credit risk), exposures to individual issuers are relatively small, occasionally exceeding 2% of the portfolio. The credit rating of most of the portfolio is the same or better than that of Polish (at least A-). On the other hand, there are only a few issuers with a BB+ rating or worse (i.e. the so-called high yield) and they do not exceed 10% of the portfolio in total. Credit risk is therefore at a relatively low level. Importantly, the liquidity of the bond market denominated in EUR is incomparably better than in the case of bonds denominated in PLN, which allows for a quick response in the event of a deterioration in the credit quality of any of the issuers.
Impact of the current market situation on Generali Euro and prospects for 2025
The market situation last year was extremely favorable for Generali Euro – since September 2023, ECB interest rates have been at the highest level in their history and despite a series of 4 cuts, they still remained relatively high. At the same time, the market was already pricing in further reductions, which resulted in a decrease in yields (increase in prices) of securities with a relatively longer maturity. These two factors – high interest rates at the short end of the curve and an increase in bond prices from the middle and longer end of the curve – allowed us to achieve the best annual return in the history of the subfund, which in 2024 amounted to as much as 5.45%.
What’s ahead?
In the horizon of the next few quarters, the outlook for Generali Euro is still positive, although we are aware that last year’s result would be difficult to repeat. Our forecasts for this year indicate a result of 2-3%, which should be supported by the still relatively high current profitability of the portfolio (currently almost 3.5%, although it will decrease over time).
As far as the market environment is concerned, attention should be paid primarily to the ongoing cycle of monetary policy easing by the ECB. Currently, the deposit rate is 3% (compared to 4% at the end of 2023 and the first half of 2024), which is quite high by European standards – the rate was higher than now only in 2000-2001, briefly in 2008 and in 2023-2024. According to economists’ forecasts and market valuations, in the first half of the year we can expect another 3-4 cuts, which should bring the rate to a more or less neutral level of nearly 2%, where it would remain in the medium term. At the longer end of the curve, we are currently dealing with relatively high yields – in the area of 2.5% for the German 10-year bond. Taking into account the expected interest rate cuts and looking at the weakness of the European economy, and especially the German economy, which has been persisting for several years, it seems that there is some room for a decrease in yields (an increase in bond prices). At the same time, credit spreads have narrowed very clearly over the past year, but in Poland and more broadly in Central Europe, they still remain at elevated levels. This means that bonds from our region should still give significantly higher rates of return than in Western Europe or the USA. In such an environment, we expect a result of 2-3% in 2025 to be very realistic, with the first half of the year promising to be much better than the second.
Risk factors
On the risk side, it is important to remember primarily about the geopolitical situation – the ongoing war in Ukraine or the possibility of a new conflict. The second factor that could negatively affect the market is the risk of escalation of trade wars initiated by tariffs imposed on other countries by Donald Trump. In an extreme scenario, this could lead to a significant increase in global inflation, and thus translate into an increase in bond yields. These credit spreads could in turn widen in the event of a sharp economic slowdown and a prolonged recession.
Taking into account the market situation outlined above and the main risks indicated, we believe that the Generali Euro subfund has a great potential in the current situation to generate rates of return significantly higher than the interest rates on foreign currency deposits offered in Polish banks. In this context, investing in Generali Euro seems attractive especially for those people or companies that have or would like to build savings in a stable foreign currency, which is undoubtedly the euro.