FIXED INCOME: European bond market remains expensive, we prefer the alternatives

Redacción - Miercoles, 08 de Abril

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The European Central Bank (ECB) proclaimed victory in the first month of its extended asset-purchasing programme, also known as quantitative easing. The ECB has bought EUR 47.7 billion of sovereign debt, ranging from EUR 11.1 billion of German paper to zero for Estonia (no government debt), Greece (not eligible) and Cyprus (not eligible). In addition, the ECB has also purchased covered bonds and asset-backed securities, bringing the total to the target of EUR 60 billion per month. We acknowledge that the programme will keep yields in the euro area at levels that are lower than we have ever envisaged. That said, we note that incoming economic data is consistent with an acceleration of economic activity. The service sector purchasing managers’ indices rose to 54.2 in March, up from 53.7 in February and a trough at 51.1 in November last year. A reading above 50 indicates an acceleration of activity in the non-manufacturing industries. ECB member Mersch noted that the purchase programme could be altered if underlying economic conditions warrant, meaning that the ECB could reduce its purchases if growth and inflation expectations continue to improve.

Yields in the euro area are at levels that are not sustainable in the medium term. We prefer investments outside the EUR bond market, such as European equities, real estate-investment trusts, or USD high-grade bonds.

Markus Allenspach, Head Fixed Income Research, Julius Baer

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FIXED INCOME: Greece commits to paying its loan to the IMF as expected

Greece has confirmed that it does not intend to be the first country to default on its International Monetary Fund (IMF) loan and that it would pay the EUR450m due tomorrow according to plan. Today Athens will auction EUR875m six-month treasury bills and use part of the proceeds for the IMF repayment. This auction will be interesting to watch with reports suggesting that it is likely to be funded domestically as foreign investors may be unwilling to maintain their exposure.

 

Pressure on the government is rising as an additional EUR1.4bn comes due next week and Greece is still in negotiations with the European institutions regarding the disbursement of the remaining EUR7.2bn of bailout support; while various steps have been taken in the direction of Europe, it is still a long way until the final agreement is reached in time for the Eurogroup meeting on 24 April. As a latest step to support the Greek coffers, Prime Minister Tsipras announced his intention to demand World War II reparations from Germany amounting to ca. EUR280bn. While ideal if successful, since it would lower Greece’s debt to ca. EUR40bn (and debt/gross domestic product [GDP] to 25%), we regard the plan extremely utopic.

 

We are maintaining our negative call for Greece as the political environment remains highly uncertain. We still regard a Grexit scenario as unlikely; however, volatility will not abate soon.

Eirini Tsekeridou, Fixed Income Analyst, Julius Baer

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COMMODITIES: No lasting support from copper supply disruption

Supply disruptions are back in focus for the copper market and have pushed prices above USD 6,000 per tonne. At the end of March heavy rains hit Chile, the world’s largest copper producer. Output from several mines was hampered and transportation routes were cut. Lost supply should however be limited as mining companies have gradually resumed operations. Nevertheless, Chile yesterday announced that this year copper production would be slightly down from initial estimates but still up compared to last year.

 

Zambia, Africa’s largest copper producer, is meanwhile mulling changes to recently hiked royalty rates after mining companies threated to cut investment and close mines. Overall, copper mine production should continue growing this year, keeping the market well supplied. Mining cost deflation is a factor not to be underestimated in the current environment. Producers continue to benefit from low prices for mining consumables such as diesel and steel while those outside the United States receive additional relief from weakening domestic currencies. Our gauge of marginal producer currencies has fallen to the lowest level in more than a decade and is down almost 20% since the beginning of last year.

 

Support from supply disruptions is unlikely to last for copper. Growing mine production should keep the market well supplied with persistent weakness in China’s property market representing the key downside risk. We maintain a neutral view.

Carsten Menke, Commodities Research Analyst, Julius Baer

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INVESTMENT STRATEGY: Iran – a future frontier market ? The first sanctions against Iran were imposed following the Iranian Revolution in 1979. They subsequently were expanded in 1995 and in 2006. In Lausanne last week or after 36 years a provisional agreement was reached on a framework that once finalised would lift most of the economic sanctions. A turning point for a battered economy with a population of close to 80 million people. On Bloomberg 263,393 active funds can be found. Screening for equity funds with geographical focus Iran results in zero matches. The financial industry will have to reassess investment opportunities in Iran and there are likely to be newly launched products. Although not investable today, Iran is get-ting back onto the global map – welcome   If sanctions are lifted, Iran is getting back onto the global map. The financial industry will have to reassess investment opportunities in a country with 80 million people. Heinz Ruettimann, Strategy Research Emerging Markets, Julius Baer

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