Europe’s incredible declining yields

With yields grinding ever lower, income-seeking investors have begun to head in some novel directions.

For income-oriented investors, the combination of ECB quantitative easing, negative yields and negative interest rates is a real problem. Increasingly they are reallocating their funds into investment grade or high-yield bonds, but also into other interest-bearing asset classes. Given the small size of the market for higher yielding assets, even only a minor reallocation of money will support spread tightening and, we believe, lead to attractive total returns over the course of the year.

Part of the reallocation has already taken place on the back of stabilizing growth indicators in Europe and sound credit fundamentals. Up to the end of February, according to JP Morgan data, mutual funds saw strong inflows, reversing most of the outflows from the second half of 2014. The same data suggests high-yield debt now accounts for some 8% of mutual fund assets.

Henning Lenz – Meriten, a BNY Mellon company

For income-oriented investors, the combination of ECB quantitative easing, negative yields and negative interest rates is a real problem. Increasingly they are reallocating their funds into investment grade or high-yield bonds, but also into other interest-bearing asset classes. Given the small size of the market for higher yielding assets, even only a minor reallocation of money will support spread tightening … read more

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Bearish on Russia?

Confidence has fallen but investors still see opportunity

Russia has been under stress because of the situation in the Ukraine and because of the falling oil price – and clearly, as shown by the data above, this has affected the short-term outlook for growth.

But, taking a longer term view, we believe it’s possible to look beneath the headlines to uncover hidden value. In Russia, for example, on a corporate level, we’ve recently identified several opportunities where we believe corporate debt has been oversold and a re-pricing is overdue. One area of interest is companies whose assets or revenues are in dollars and who therefore benefit from a decline in the rouble.

For us, the failure of the market to drill down beneath the surface to recognise these opportunities is part of the attraction. By targeting unloved or out-of-favour areas we aim to capture a long-term structural premium. That’s one of the reasons Russia remains an exciting place to invest.

Robert Simpson – Insight, a BNY Mellon company

Russia has been under stress because of the situation in the Ukraine and because of the falling oil price – and clearly, as shown by the data above, this has affected the short-term outlook for growth. But, taking a longer term view, we believe it’s possible to look beneath the headlines to uncover hidden value. In Russia, for example, on … read more

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China: not deleveraging

China's debt reached 282% of GDP in 2014

We have been watching the build-up of debt in China for some time in line with our Debt Burden theme. Indeed, the pace and extent of the debt acceleration in China is behind our major concern for China’s growth outlook and our underweight position in the market. Current estimates of debt in China vary, but they are in the range of 250-280% of GDP. This is approaching levels seen in developed markets such as South Korea, the USA and Germany. With such a surge in credit one must question the quality of this lending, especially when much of it has essentially been dictated by the state rather than on a rigorous risk-adjusted basis. This stock of bad debt is the crux of the problem, and has the potential to derail growth in China. We are not convinced the banks’ reported non-performing loan figures reflect this reality, and we believe the market is too relaxed about the built up risks, assuming the central government can bail the system out. The other aspect of the huge growth in leverage in China is the extent of “shadow banking” i.e. non-formal lending. Some estimates suggest up to 30% of total debt is of this nature, which accentuates the systemic risks to the financial system in the event of a growth slowdown.

Caroline Keen, Newton – a BNY Mellon company

We have been watching the build-up of debt in China for some time in line with our Debt Burden theme. Indeed, the pace and extent of the debt acceleration in China is behind our major concern for China’s growth outlook and our underweight position in the market. Current estimates of debt in China vary, but they are in the range … read more

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Breaking free of the ‘fragile five’ misnomer

India was previously plagued by a high fiscal deficit, bad policy choices, high commodity prices, an extended credit cycle, high inflation and a weak currency. Now it has a credible and strong-willed central bank, a reform-minded government, and commodity price falls which are very beneficial to its terms of trade. We are increasingly confident that some of the major blockages for reform are in the process of being dismantled, and the government has already taken some bold steps, such as removing fuel subsidies.

In a market context, India has moved from one of the ‘fragile five’ to being highly favoured among emerging market investors, and near-term valuation multiples have moved to reflect investor optimism. We anticipate that some investor fatigue will be felt; however, over the longer term, India still looks very attractive, and is in the early stages of recovery from a cyclical downturn. Hence, current valuations are likely to be underestimating the profit upcycle for years to come and we think India will be one of the strongest equity markets in the world over the next five years.

Rob Marshall-Lee – Newton, a BNY Mellon company

India was previously plagued by a high fiscal deficit, bad policy choices, high commodity prices, an extended credit cycle, high inflation and a weak currency. Now it has a credible and strong-willed central bank, a reform-minded government, and commodity price falls which are very beneficial to its terms of trade. We are increasingly confident that some of the major blockages … read more

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