Italian and Spanish debt are better investments than Nordic government bonds as Europe’s financial crisis fades, according to Johannes Jooste, a strategist at Bank of America Corp.’s Merrill Lynch Wealth Management.
“Investors are more comfortable with risk -- the areas where they were defending against risk have become very fully valued,” Jooste said today in an interview in Helsinki. “The safe-haven argument is slightly diluted by the fact that some of the things you need to hedge against have become less risky.”
Yields on bonds issued by AAA rated Nordic nations Denmark, Finland, Norway and Sweden plunged in 2012 as the European debt crisis attracted investors who favored safety over returns. As investors gain confidence that Europe’s leaders can end the region’s turmoil, markets have turned. The euro has had its best start to a year against the dollar since 2006 on bets the worst of the three-year debt crisis is now over.
“On the fixed income side, one of our themes for the year is unloved assets, mispriced ones,” Jooste said. “For the right risk profile, we’re looking to add some Italian and Spanish exposure. Some government, or high-grade corporate.”
Spanish lenders have raised more than 8 billion euros ($10.7 billion) as they returned to bond markets this year and today the country sold 2.8 billion euros of bills, overshooting the maximum target to tap investor demand. Italy is on track to meet its goal to balance the budget in structural terms, or excluding the effects of the recession, this year, Finance Undersecretary Gianfranco Polillo said last week.
“Some of the high-grade corporates in Italy and Spain have got very solid fundamentals,” Jooste said.
This year, Italian debt longer than one year has gained 1.9 percent while Spanish bonds have advanced 1.3 percent. That’s the third- and fourth-best performing government debt so far in 2013, according to Bloomberg/EFFAS indexes. Debt issued by all four Nordic countries has declined in value this year.
Stocks may outperform bonds this year as banks, acting “like the canary in the coal mine,” are looking “stable,” suggesting better conditions for equities, the analyst said. “We continue to watch sectors which have good exposure to emerging markets.”
International investors are the most bullish on stocks in at least 3 1/2 years, with close to two-thirds planning to raise their holdings of equities during the next six months, according to a Bloomberg survey.