20th March 2015
Bonds markets and currencies are on a ‘different path’ and may now provide alternative opportunities for investors, according to David Jane, manager of Miton Mutli-Asset funds.
Jane is expecting the strong dollar and weak euro trend to persist ‘for some time’ opening up attractive prospects in the Eurozone. The weakness in the euro versus sterling and the dollar is considered to be a consequence of quantitative easing, as is ‘the extraordinary strength of continental government bond markets’, he said.
‘While US and UK government bond markets may have peaked at the end of January, German yields have continued on lower, now only 20 basis points at 10 years.’
This means bond markets and currencies ‘are now on a different path worldwide and this may offer some opportunities’.
‘We have had a view for some time that the US, being further forward in the recovery process, offers some further potential for currency strength, especially when considered from a much longer perspective,’ said Jane.
‘While the trade weighted index may be up 25% from its lows last year, a much longer term view shows it is still a long way below its longer term peaks. With the US labour market going from strength to strength, and potentially having room for interest rate increases, this trend could continue for much longer.’
He added that with QE in place the weak euro could persist and there is nothing to stop it trending lower.
To benefit from these moves, there is ‘little value in buying eurozone government bonds’ as the ‘potential for gain is minimal and, however strongly, we might believe the trend may continue, there is potential for material losses from these elevated levels’, said Jane.
‘We do however find good potential in equities in the eurozone, particularly in the mid-sized beneficiaries of a weak euro, where expectations have been slow to catch up with events,’ he said.
There is also opportunity in the bonds of these companies if they are shorter dated.
Moving to the US and much the same applies.
‘We have moved our equity exposure to a strong domestic bias, avoiding the big international companies which are suffering downgraded as a consequence of the strong dollar and are considering some US high yield credit exposure, where yields are quite attractive compared to elsewhere,’ said Jane.
The UK is stuck somewhere between the middle of the US and the euro as sterling has been a little weaker lately, even against the euro, possibly as a reflection of the election.
‘We have a portfolio more focussed on the domestic mid-sized names, looking for beneficiaries of improving real wages and a better eurozone economic background,’ said Jane.