by Credit Suisse
08.06.2012
While yields on 10 year Greek bonds have risen above 30 percent, yields on short maturity German bonds were temporarily negative. In the midst of market oscillations, new investment opportunities arise, says Robert Parker, Head of the Strategic Advisory Group at Credit Suisse.
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Cushla Sherlock: Many investors seem to be between a rock and a hard place. What themes can provide more sustainable performance?
Bob Parker: Since march we’ve seen investors de-risk their portfolios: cash levels have increased. And most notably there has been a significant capital flow into G4 government bond markets, which is why we have historically low yields in 10-year US treasury bonds and 10-year bunds, as well as in the UK gilt market and Japanese government bonds.
What worries investors? They are concerned about the eurozone crisis and worried about contagion risk if Greece leaves the euro. Even more so, they are worried about bank risk in Europe and particularly the problems of bad debt ratios in the Spanish banks. Outside Europe there are justifiable investor concerns about a slowdown in the US, and recently – particularly since April – we have seen weaker economic data out of emerging economies.
Does this unfolding phase of volatility in Europe create an opportunity to enter stock and credit markets on dips?
The case for being in European bonds is very weak. If, for example, you go into German government bonds with these historically low yield levels you’re not being rewarded for taking that risk. Recently, short maturity German bonds were yielding zero even negative for a few days. Conversely, if you go into very high risk areas, like Greek bonds, they do yield 30 percent for 10 years but obviously the risks of a Greek exit are profound.
Elsewhere in Europe there is still a case for being in high-dividend northern European companies. One opportunity is that the weakness in the euro – we have now come down on euro/dollar to around 1.25 – is a strong positive for German and other northern European export companies: capital goods companies which pay high dividends and are underleveraged. Therefore in European equity markets there are obviously opportunities. One key question, however, is what happens if the European Union and the ECB take strong action to defend the eurozone? If we get a further round of long-term refinancing operations (LTRO) from the ECB, which is likely and could be up to a trillion euro, then we will see a bounce in European markets.
How does the second half of 2012 look, compared with the second half of 2011?
Assuming that we will see moderate growth in the US for the second half of the year at just under 2 percent and that China has a soft landing, with close to 7-7.5 percent growth, and assuming that the Brazilian government will be successful in kick starting its economy, we could see some recovery. It is critical that we get a raft of measures to fix – even temporarily – the eurozone problem. The right strategy in fixed income is to continue focusing on corporate bonds and emerging debt.
The defensive strategy in global equity markets has been the right one for the last 2.5 or 3 months, but as we go into July a more aggressive position can be taken – particularly if action is taken by the Europeans. I would barbell that position, focusing on north American and northern European large-cap capital goods, high-dividend companies but then take risk into emerging markets, notably China and Brazil. These markets are cheap, under-owned by investors and the authorities are easing monetary policy. Overall, an increase in risk appetite is probably the right strategy going into late July and certainly the third quarter.
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