Weaker euro, low oil prices: stars aligning for Europe
Europe could exceed low growth forecasts to reach up to 2% growth in 2015 aided by the effects of the European Central Bank’s (ECB) €1.1trn bond purchasing programme, says Neuberger Berman, one of the world’s leading employee-owned investment managers.
“The stars are finally aligning for Europe” believes Jon Jonsson, manager of the Neuberger Berman Global Bond Absolute Return fund. As a result, the fund, which launched in September 2013 and recently surpassed $100m AUM, starting buying European High Yield in the fourth quarter of 2014 and has now built up a 5% position.
Jon Jonsson commented, “A combination of two factors really stunted growth in Europe in 2014. Allowing the Euro to appreciate to 1.4 against the dollar proved a huge mistake. Meanwhile, the Asset Quality Review had a significant negative impact on credit flow in Europe. However, the ECB’s new quantitative easing (QE) programme has pushed the Euro down and countries such as Germany and other exporting economies have reacted positively.
“Including the weaker Euro, there are a series of supportive factors for growth in Europe such as low oil prices which have been a significant boost, and increased credit growth and flow, especially to households and non-financials. In December last year, loans to the private sector turned positive for the first time since mid-2012. Added to this, the QE programme should give cheaper and more accessible credit. In addition we expect the lower levels of fiscal in the region to be beneficial. We can expect growth to be closer to 2%, rather than the 1.3% forecast by the European Commission. Despite this, risks still remain as some fiscal austerity persists and many banks are still deemed too big and face continued deleveraging.”
Due to its conviction in Europe, the team has increased its allocation to European High Yield. Jon explained, “We initially focused on BBs that have suffered mostly from poor fundamentals on the sovereign side but are now moving into the asset class more broadly. We have chosen names that are upgrade candidates and that we expect to become Investment Grade.”
The Global Bond Absolute Return fund maintains a short duration bias as Jon explains, “We maintain our negative duration position since we view yields to be artificially low and unattractive from a risk/reward perspective. Although inflation expectations remain subdued, we believe that market pricing of the Fed’s path looks too low. As spare capacity continues to be absorbed, positive surprises on wage growth and price developments later this year as headwinds from lower oil prices fade, will allow the Fed to take policy rates above the level that the forwards currently discount putting upward pressure on global yields.”
Other areas in which Jon sees opportunities for the Neuberger Berman Global Bond Absolute Return fund include the following:
- “US subprime mortgage bonds are one of our highest conviction trades and we hold a 15% position in the fund. The fundamentals of subprime bonds have been improving dramatically, benefitting from the low oil price which frees up capital for people to repay their home loans. It has also stimulated the economy, having a positive effect on house prices and employment. On the technical side, as those bonds continue to be paid, supply decreases. We are buying old vintages that were issued between 2003 -2006.”
- High Yield: “Overall the fund holds 10% high yield which is split between Europe and the US. Regarding US high yield, valuations have become much more attractive in recent months. We have moved from being initially short last summer to long in high yield and riskier assets in the US generally.”