Despite the impressive tightening of peripheral government bond spreads, ING IM still like this asset class. Thay have even added to their overweight position recently. They also have a preference for peripheral equity markets, as they expect them to outperform the broader market as peripheral economic data improve further.
The market correction in January has already shown that EM turmoil itself is not enough to create significant uncertainty in the periphery, even though some countries have both a trade and financial exposure to the emerging world. Spain for instance is particularly vulnerable to shocks in Latin America.
Italian and Spanish spreads hardly affected during sell-off
Peripheral government bonds have held up well
During the emerging market (EM)-driven financial market turmoil of a few weeks ago, not only EM assets came under pressure. Also risky assets in developed market (DM) space were confronted with a sell-off. For instance, spreads of High Yield credits widened. One category that held up quite well during the correction were government bonds of the peripheral Eurozone countries. The chart shows the very limited spread widening that took place for Italian and Spanish 10-year bonds (over German 10-year bonds) during this phase of increased market volatility.
Peripheral equities expected to catch up
Next to peripheral debt, ING IM also has a positive view on peripheral equity markets. “Despite strong performances in the past twelve months, peripheral equity markets have not yet caught up with the rapid spread tightening of peripheral bond markets. We expect equity markets to catch up further as peripheral economic data improve. Peripheral equities versus core equities is one of our preferred regional trades for this year”.
It was striking to see – and a nice example of the turnaround in sentiment towards the peripheral countries – that during the recent correction, stock markets of countries like Spain and Portugal acted as defensive ones, while markets of core countries such as Germany, France and the Netherlands suffered bigger losses. One explanation for this could be that big German and Dutch companies with a relatively large share of revenues derived from emerging markets are seen as more vulnerable to turmoil and slowing economic growth in emerging markets.
“In our tactical asset allocation we have an overweight position in European equities, with a preference for the peripheral countries”.
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Por Fórmate a Fondo
Por Alicia Miguel Serrano