Despite multiple bailouts and austerity measures, debt managers remain pessimistic about the eurozone, as David Walker reports
Another threat now facing the austere periphery is interest rate rises, and their effect on consumers’ wallets.
They are being hit hardest by rate hikes such as the 0.25 basis point hike by the European Central Bank to 1.25% in April, said Williams, as their mortgage rates are more sensitive to official rate moves than are core Europe’s.
However Williams and other managers concur rate rises are needed to anchor inflation expectations, and say the ECB cannot act only with the eurozone’s periphery in mind.
Revisiting dogmas
Managers now await 2013, when Europe’s Financial Stability Facility is replaced with the European Stability Mechanism, and new rules around debt able to be ‘bailed in’ are ushered in.
Pioneer’s Le Saout said, as long as governments of beleaguered nations follow “tough policies demanded by the IMF, they will continue to receive support, one way or another. Volatility will be here for a while and should create good opportunities”.
He said the debt crisis has led a lot of managers to “revisit dogmas [and] going forward we need to be more flexible, not dogmatic. If we have another crisis, we should not count on the officials to move and bail out the way they did for this one.
“We also believe government bonds are a different asset class now. It is not so much about relative value any more but a deep credit analysis is needed for each single country. Some countries are falling sub-investment grade…due to a structural change in the market, which means we have to change the way we trade accordingly.”
The uncertainty has damaged a lot of investors, but it has also created investment opportunities, managers said.
In mid-April La Saout said: “The market has begun splitting countries into categories. We don’t see too much opportunity in Greece as it looks like restructuring is almost inevitable. Ireland has a long and tough path to get out of the danger zone, however some longer-dated bonds could be interesting.
“Spain has started looking tight but there is an execution risk there due to the recapitalisation of the banking sector. Italy still looks the best risk reward country within the peripherals as the high level of private sector saving is able to finance the government debt.”
