It's All About European Peripherals in 2018 for JPMorgan AMBy
An improving European growth outlook means JPMorgan Asset Management’s Nicholas Gartside sees peripheral bonds as the trade for next year.
The periphery has outperformed benchmark German bunds since October thanks to the cooling of Italian and Spanish political tensions as well as the European Central Bank’s decision to extend its asset-purchase program. Growth in the euro region will further support the securities next year and they are also a good way to hedge against the risk that the ECB acts to raise interest rates, according to Gartside, the London-based chief investment officer for fixed income at JPMorgan Asset.
“If we’re looking for risks in markets and signs of complacency, one is the ECB are on permahold and the risk, given the strong growth outlook, is they lift rates,” he said in an interview. “You need to find assets that really benefit from a stronger growth environment, so that would be peripheral bonds in Europe.”
Gartside said he recommends going overweight peripherals versus German government bonds, and sees the 10-year yield spread between Italy and Germany tightening from around 135 basis points to about 100 “before trading back to the 2015 tights of 90 basis points.”
“When you look at metrics like the budget deficit, the fact that Italy runs a current-account surplus, some of those statistics are frankly the envy of other European countries,” said Gartside. “Italy does a lot right, and when you look at valuations we would argue it doesn’t reflect that.”