ECM’s Zinser outlines portfolio positioning for 2013 environment
Stephen Zinser/CEO and co-CIO of ECM Asset Management, a boutique within Wells Fargo, sees a particular set of macro and micro risk factors challenging managers through 2013, and is set to position portfolios accordingly.
The darkest clouds in Europe have lifted as a result of the ECB’s OMT programme which provides the unlimited albeit conditional backstop previously lacking.
For the first time in nearly three years, a reasonable framework has been set out which has a chance to stabilise markets. As a result fears surrounding a near term exit by Spain or Italy from the euro have receded. Imbalances in the TARGET2 (European cross border financial transfer system) are starting to reverse as capital begins to return. Spain’s negative balance, for example, has fallen by €20bn in October following a €30bn drop in September. Further evidence of improved sentiment can be seen in corporate debt issuance data. Fifty per cent of European corporate issuance in October came from the periphery as markets and capital flows improved.
Peripheral government bond yields remain range-bound as the markets – we believe correctly – take the view that a Spanish request for official support will eventually come. Hence there is little point in worrying about it.
Markets have also taken comfort that European political leaders and the ECB are generally on the same page these days. Greece remains a tail risk but the Hellenic Parliament’s successful passage of the Troika-endorsed austerity plan has been taken as sufficient progress such that the risk of a Greek exit from the euro once again has been kicked into touch for a reasonable period.
With tail risks diminishing the focus in Europe is shifting to growth and the time required for the periphery to exit from recession. Here recent news is less favourable as the EU lowered its growth forecast for the eurozone in 2013 to barely positive.
While the near term outlook is challenging we do expect in the latter half of next year that the first green shoots of recovery will begin to appear, driven by a more supportive global economy and a slower pace of deficit reduction. The competitiveness gap in periphery countries is being closed as can be clearly seen in the trade balance data particularly from Spain.
This environment of very low growth but receding systemic risks will not only be supportive of credit markets generally in 2013 but will also create greater dispersion amongst individual credits and sectors which we expect will play well to ECM’s skills in stock and sector selection.