European Debt Assets Offer Value, Marathon’s Richards Says
Global funds managers see value in debt securities of European nations as measures by the region’s leaders and central bank have cut risk amid signs of continued economic weakness in the region.
Yields on the 17-nation euro-area’s most indebted nations, including Spain and Italy, have fallen since the European Central Bank unveiled its Outright Monetary Transactions bond- buying plan, known as the OMT, in September, pledging to spend as much as needed to restore confidence in government bond markets. While the central bank’s offering of loans beginning in December to banks through its long-term refinancing operations, or LTROs, has helped provide liquidity to the banking system.
“Compared to earlier this year, when the risk factors were pretty substantial,” things have improved, Bruce Richards, chief executive officer of Marathon Asset Management LP, said at the Bloomberg Portfolio Manager Conference in New York. “Now with how the leadership in Europe has come together and the central bank has progressed with the OMT and LTROs and various programs that are supportive, you can get your arms around the risk. Europe presents to us at Marathon the best distressed opportunity that we see anywhere globally.”
European Central Bank President Mario Draghi said today the economic outlook is worsening and the bank stands ready to activate its bond-purchase program if governments fulfill the necessary conditions.
“We are ready to undertake” Outright Monetary Transactions, “which will help to avoid extreme scenarios,” Draghi said at a press conference in Frankfurt after policy makers left the benchmark interest rate at a historic low of 0.75 percent. “The risks surrounding the economic outlook remain on the downside” and underlying inflation pressures “should remain moderate,” he said.
While bond yields have fallen in Spain and Italy since the ECB unveiled its OMT program, investors are still waiting for Spain to request aid from Europe’s bailout fund, a prerequisite for the ECB to actually intervene in debt markets.
Spain’s 10-year yield has fallen from 7.6 percent in July to 5.85 percent.
Spanish Prime Minister Mariano Rajoy said on Nov. 6 he needs to know how much the ECB would push down Spain’s borrowing costs before his government applies for aid and signs up to the conditions attached.
The spread of yields of peripheral European debt above that of German bunds, viewed as a safe-haven of the region, are likely to narrow if Spain makes a request for OMT debt purchases, Richards said.
German bund yields are so low now “as a result of the flight-to-quality demand,” Matthew Eagan, a money manager at Boston-based Loomis Sayles & Co., said at the conference. If more progress is made, Spanish debt yields “could continue to contract. There is no reason why German bund yields should trade inside the U.S. Treasury curve but they do because of the flight-to-quality bid.”
The U.S. 10-year Treasury yield traded at 1.62 percent, while that on the similar maturity German government bond was 1.36 percent.
“We see opportunities in good investment grade corporate debt in Europe,” said Eagan. Some dividend-paying stocks in Europe also are also attractive, as well as long-term debt or Portugal, if the currency risk is hedged, Eagan said.
Economic confidence in the 17-member euro area dropped to a three-year low in October, adding to signs that the region is in recession after gross domestic product fell 0.2 percent in the second quarter. Third-quarter GDP is due on Nov. 15.
In Germany, Europe’s largest economy, reports this week suggested growth is grinding to a halt. Exports, factory orders and industrial production all fell more than forecast in September. Last month, business confidence dropped to a 2 1/2 year low.
The weak outlook for growth makes shares of the majority of companies unattractive at this time, according to Abhay Deshpande, portfolio manager at First Eagle Investment Management, who also spoke at the conference.
“Europe is a difficult place to find a lot of value,” said Deshpande. “There are some opportunities there where you don’t have to take specific European risk,” mentioning Nestle SA, which gets about half of its earnings from emerging markets. “But everyone knows that,” which has made the valuation less attractive, said Deshpande.
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