We spoke with Marie-Anne Allier, Head of European Fixed Income, Amundi, attempting to discover where to look for the opportunities this fall. According to the expert, these are wherever you can still obtain some yield, and this must be understood as corporate debt- including high yield- and in emerging markets, where you can still find attractive yields relative to risk. There are still good opportunities in European government debt, which central banks continue to hold; and, in the United States, although the expected hike in interest rates would make its market disappointing compared to the European markets.
In Allier’s opinion, attractive risk-return tradeoffs can be found in emerging markets, in both sovereign debt and in some of the corporate debt. On the other hand, she says, the risk is not so high, especially after the decline in emerging markets’ valuations. For those who do not want to take too much risk, or are not as confident, she points out the option of entering into emerging debt –either sovereign or corporate- without suffering the greater volatility of the currency, i.e. not entering local currency but in hub currency. Emerging debt in hub currency offers a return to risk which is increasingly comparable to what can be found in developed markets.
That said, there are still good opportunities in government debt. If you look at the Euro zone, the best performances belong to government debt, for the simple reason that it is the area in which the central banks are buying debt. We are seeing that buying Italian, Spanish, and Portuguese debt, even government debt, is currently an opportunity, simply because the central banks are buying debt. There are no financial or economic reasons; it is a conjectural reason: the ECB. "In fixed income there are still many opportunities. That said, you will not have a double-digit return. "
In Europe, corporate debt is appealing only because of the ECB’s CSPP (corporate sector’s purchase program). It's like a 'stop loss,' Allier explains, at the end of the day the central banks buy. The situation in Europe is defined by the lower leverage of corporations and increasingly less appetite for debt issuance -because their needs are less-, and the increasing number of investors. "Prices will go up," says Allier.
European companies do not need to issue debt because investments have been reduced. Alos, Allier thinks they are managing their balances in a more reasonable manner than before, after two credit crunch crisis in Europe over the last ten years. Companies’ CFOs are not currently looking to make money through financial management, but through the business plan, and are leveraging less, they want to be sure that they can manage the current business, even during a crisis situation.
In fact, after the crisis, in which access to credit has been so difficult, companies are taking advantage of those opportunities when the market has been better, to buy back short-term debt and issue at very long term. So now, there are no previous issues that will be redeemed in the short term, and therefore the financial needs of corporations in the next two to three years will not be as high.
In short: "there is currently no issuing, but investors are seeking, so it is an opportunity. Again, not to obtain 6, 7, or 8%, but it is an opportunity when compared to your money earning nothing or leaving it in a bank."
Until when is necessary for central banks to continue to act in Europe?
Until 2018, or even 2019, according to the Head of European Fixed Income at Amundi. "In order to change, we need to be able to boost inflation slightly and growth in the Euro zone, and that is not something that is in the hands of central banks, as it is more a matter of budgets and policies." So when governments can boost the potential for growth through reforms, central banks will be able to exit the market. "What central banks are doing is to buy time for governments to act. The answer is in the hands of governments: if they are able to reform, to boost inflation and growth, then central banks will relax the current accommodative policy,” she added.
It seems that the yields in the US are better now, but by buying European debt, which is held by the central banks, and hedging the currency, diversification is achieved. In addition, we must take into account the possible actions of the Fed. "If we are right and the Fed hikes rates by 2017, at one point there will be losses in the US bond market, so this could be disappointing as compared to the European markets, where central banks will not relax their policies in 2017. "
A final comment: The executive draws attention to the existence of a certain bias that invites us to think that bonds are expensive. "We have to change our mentality."
And a sector in which is better to be with fixed income than with equities: Banks are better capitalized than they were in 2008 or 2011, the ECB is doing a great job, says Allier. "I would be more worried as an equity holder than as a bond holder. The return on equity of the banking industry is not very good "because the industry faces many challenges, and in Italy -for example- new banks will go public. However, from the point of view of debt, banks have more capital and are more supervised than before. Not all banks are the same, but the overall picture is better today than it was in 2008, she concludes.