BlackRock retains postive views of European periphery, says Scott Thiel
Scott Thiel, head of European & Global Bonds at BlackRock, comments on yesterday’s ECB announcement and global fixed income themes.
The European Central Bank kept headline interest rates unchanged. During the press conference that followed, president Draghi met our expectations in the provision of more explicit verbal accommodation. He noted that members of the Governing Council were unanimous in their commitment to use unconventional measures should the situation warrant it, to cope with “risks of a too prolonged period of low inflation”.
We retain our positive views of the European periphery countries and currently prefer to express this via Spain, Portugal and Slovenia. Portugal and Slovenia are now among our highest conviction views and although we have already seen significant spread compression, particularly in front end Portuguese government bonds, we expect a further decline in their respective spreads over Bund yields.
In the emerging market space, while we are fully cognisant of some of the problems currently affecting this sector (besides recent events in Ukraine, the external imbalances that some EM countries have, the withdrawal of liquidity through US tapering and a slowdown in the growth rates of many emerging markets), we do see select investment opportunities.
As such, we like some front-end hard currency government bonds, such as Turkey and Indonesia, which we feel offer value and will not be impacted by the adjusting currency moves. In addition, we like the bonds of Indian banks. These have relatively low foreign ownership and we believe in the credibility of the Governor of the Reserve Bank of India to use monetary policy to tackle the country’s inflation problem.
In addition, we have recently added South African government bonds to portfolios that can hold them. This is based on our view that the weaker rand and improved trade balance have already led to a narrowing of the current account deficit and that further weakening of the currency, rather than a significant change in interest rates, will continue to benefit the current account adjustment (unless inflation breaches the South African Reserve Bank’s inflation target for a sustained period of time).
Finally, over recent weeks we have increased our positioning in the US securitised sector. This is particularly concentrated in those securities connected to the US housing market given US household deleveraging, an improvement in the housing market and the limited impact of retail flows on this sector.