In just a matter of months, the Finns have made a true transformation: while they were the continent’s most cautious on the performance of the economy last November, they have now become Europe’s biggest macroeconomic optimists. Some 83% of the fund selectors our researcher met on her visit to Helsinki earlier this month have a positive view on the economy, up from just 34% last autumn. The Finns are not as buoyant as the numbers suggest though. They expect the ECB’s newly launched QE programme and the cheaper euro to boost the European economy on the short term, but are not convinced the recovery will last.
As one fund selector put it: “I feel I have to dance while the music is playing, but it’s best to stay near a chair so I can sit down quickly in case the music stops.”
A contrarian bet
High yield bonds are generally unpopular with Europe’s fund selectors (see graph below), but the Finns believe the ECB’s QE will benefit not only equities, but all risky assets. So almost seven in 10 interviewees plan to allocate more to high yield bonds (see pie chart), while developed market government bonds are being heavily sold off. Those who don’t, mainly institutional investors, all cite regulatory constraints forcing them to own a set percentage of government bonds.
While fund selectors see QE as contributing positively to equity markets and an export-led economic recovery, some accused the central bank of ‘ruining the bond markets’ by planning to buy a monthly €60bn in mainly government debt on the secondary market for the next 18 months. Finnish fund buyers see high yield bonds as a comparatively attractive bet, considering the asset class tends to perform well in periods of accelerating growth. US high yield is seen as particularly appealing, considering bonds from US oil companies now trade at an attractive spread after the recent drop of the oil price. High yield is now also the only developed market bond category which offers acceptable yields, with many fund buyers saying the ‘hunt for yield’ is automatically leading them to high yield bonds.