Politics is putting investor strategies to the test
State Street’s Kevin Anderson says that, in the current volatile markets, fixed-income investors should adopt a more discriminating approach by looking at companies with better returns on assets and better interest coverage.
European bond market investors need to be following political developments closer than ever, now that markets are expecting Greece and Portugal to restructure their debts. The unpredictable business of politics has never been so important, says Kevin Anderson, global chief investment officer for fixed income and currencies at State Street Global Advisors (SSGA) in London.
“How the eurozone sovereign crisis continues to play out is very, very important,” he says. “One of the elements of the eurozone crisis that is different from other financial problems is this is very much a political issue as well. The political dynamics of the peripheral nations versus the growing concerns and frustrations of the core Europeans, for example the German voter, is a dynamic that does not exist in most financial problems that you deal with.”
Anderson argues that a wrong turn in policy or gathering of pace in the crisis itself could affect both corporates and financials based in the eurozone. The major risk would then be to the eurozone sovereign holdings of the region’s banks. But he does not expect the deterioration in Spain’s public finances to result in a bail-out. Spain’s troubled banking sector, however, could see bail-outs for the domestic savings banks – the cajas – but not international banks such as Santander or BBVA.
“There could be a white knight coming from the private sector, but it is likely that the Spanish government will have to recapitalise those smaller institutions. Fortunately, the amount would not push Spain over the edge because government finances are still sufficient,” he says.
Anderson does, however, anticipate a Greek restructuring, consisting of a mixed package of debt haircuts and bank recapitalisations via the usual ‘amend-and-extend’ process, followed by discussions over the triggering of credit default swap contracts.
Despite the increasing likelihood of debt restructurings in the periphery of the European Monetary Union, some brave investors have argued this offers good opportunities at longer durations. But Anderson sees risks in such a strategy.
“Uncertainty over financing has created greater yield at the short end, although there has been a more generalised credit spike, too. But there has been more stability at the long end,” he says. “There is, however, the risk of an EMU exit. The EU cannot remove a member state but a member state could decide to leave.”
In investment terms, this has led Anderson to focus on the core and not the periphery within sovereign debt, and SSGA has now switched from negative on Spain to neutral.
Sovereigns or credit are not where he views the best opportunities. “Credit is fairly valued now but we still have a historically structural overweight to credit versus sovereign debt. Much of the rally has happened and there is still risk appetite out there, so we broadly favour equities over debt, although there are caps on how much many institutional investors can allocate to equity,” he says.
Within credit, Anderson is overweight corporate debt and prefers to focus on the lower end of the investment grade spectrum and, where mandates allow, on high yield bonds. This has been his broad focus for the past quarter. He has even looked at a few corporates in Europe’s troubled periphery.