Despite a strong performance from UK credit in 2001, fund managers remain positive on the market in ...
Despite a strong performance from UK credit in 2001, fund managers remain positive on the market in 2002. The main reason for such optimism, according to Lucy Speake, director of Corporate bond management at Rothschild Asset Management, is the expectation that the US economy will recover in the second half of this year.
'In view of this, we have started to increase holdings in cyclical industrials at the expense of holdings in more defensive areas,' she says.
'After a strong run, there appears to be little value left in some areas such as banks and quasi-government bonds. Our analysis suggests that selected lower-quality industrial credits, which have lagged, appear to offer greater potential. The auto sector, which underperformed in the latter half of 2001 because of the weakness of the US economy and fears of widespread industry overcapacity, looks interesting for example.'
While there will be opportunities among the lower-rated issuers, Rothschilds feels the key to performance in 2002 will be quality independent credit research on all of the issuers that it owns to avoid any potential credit landmines, combined with a high level of portfolio diversification.
'We continue to believe that funds that blend corporate bonds with a judicious exposure to emerging market government debt can produce competitive yields and a more attractive risk/reward profile versus funds that hold corporate paper,' she says.
'The outlook for the asset class remains good as the combination of a supportive global environment, the strong technical position of the market and broadly improving credit fundamentals will allow yields to fall.'
There are always risks to this positive outlook that have to be monitored. Speake believes those risks lie in specific credits, as was the case in 2001, and therefore careful asset selection based on fundamental research remains as important as ever. 'Eastern European sovereign credits, including Russia, are expected to lead performance at least for the first few months of 2002,' she adds. 'Demand from investors continues and structural and institutional reforms should ensure further credit improvement. The rating agencies are expected to upgrade many credits in the region.'
Across the rest of Europe, although the euro rallied briefly against sterling and the dollar at the beginning of the year, it has been relatively flat against both these currencies since.
Jamie Stuttard, fund manager at Dresdner RCM, says there has been a realisation that the euro has made consumer prices more transparent between countries in Europe, which will have an impact on durable goods.
In the medium term, Bob Jolly, manager of the Gartmore Global Bond fund, sees some upside for the euro against the dollar, provided the European Central Bank (ECB) is prepared to stimulate growth by cutting rates.
He says: 'The ECB needs to be more forward-looking like the UK was in cutting rates aggressively before global economic weakness hit the domestic economy.'
In the long term, Jolly says reluctance to implement far-reaching structural reforms could weigh on the euro. He also feels political pressures to rush Eastern European countries into the eurozone will be negative.
Euro has made prices transparent.
Prospect of second half US recovery.
Potential in areas that underperformed.
Pressure to rush Eastern Europe into eurozone.
ECB must be more forward looking.
Potential for credit landmines.
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