Portuguese investors are very suspicious of the looming bailout from the European Union. Some of our interviewees were confident about the fact that Portugal can handle the continuous downgrading from ratings agencies. However, others expressed their concern and that further intervention is unavoidable, despite the several measures taken by the government during the last months.
As a consequence, many investors have become even more risk averse and therefore products with low risk profiles are favoured. Fund groups have a dual-pronged challenge – offer products with higher returns than cash, especially if there is an inflation threat; and yet with the uncertainty surrounding all major asset classes, provide some kind of guarantee against loss.
Understandably, banks have been competing in this space and capital protected funds are the largest single asset class managed by domestic fund groups.
Emerging markets are still popular, but the chaos in North Africa has caused concern and people have been pulling out. In a bid to find any returns, there has been something of a flash flood into developed market equities, although that might now have stopped.
• Portugal’s Prime Minister Jose Socrates, from the centre-left Socialist Party, has resigned after all opposition parties rejected an austerity budget. It would have been the 4th package in one year and included spending cuts and tax rises. New elections are likely to take place in a few months time.
• Portugal has succumbed to pressure and asked for a European bailout. Its total debt is now $289bn (compare to Ireland’s $145bn and Greece’s $430bn)
• Portugal raised an additional €1.645 bn on 1st April for 1-yr bonds. Interest rates were up to 5.79%, up from 3.16% for the bonds released in July 2010. Commentators are positive as the current rate remains below that for the secondary market (6.4%) and the issue was oversubscribed.
What everyone is talking about
• Fixed income – are we at the end of a 30-year bull market
• Developed vs emerging – what’s the best way to access the world’s remaining GDP growth?
• US dollar and debt – what is the future of America
• How to find absolute returns
Key points of the four biggest interviews
Portfolio manager for an institutional investor
• Emerging markets are interesting, but frontier markets carry too much risk
• US equity markets are volatile but OK, companies are in good shape, earnings are fantastic
Head of investments, pension fund operator
• Prices of Japanese equities are attractive and growing EM is positive for Japanese companies
• High yield in the US and Europe and Portuguese public debt are attractive in bond space
Portfolio manager for an institutional investor
• Sovereign debt is seeing outflows, high yield is still favoured
• Positive on developed equities, especially Europe Product manager, private banking platform
• Big impact on financials as Portuguese banks are told to reign back leverage by the central bank
• Positive view on high yield and convertibles; companies are in better shape than governments
The consensus for our interviewees is that bonds remain necessarily a huge part of their portfolios. However, since there is a general view that the long-term bull market in bonds is over, they are trying to squeeze as much of their fixed income portfolios over to the credit and high-yield side.
They are also looking for short-duration bonds in developed markets, especially Europe and the US.
Both the eurozone, with a focus on the core countries, and US equity markets are of great interest to investors.
The economic data indicates continued growth in developed countries and interviewees are looking to benefit from that. There are, however, serious doubts over the fiscal policies of the US government and the long-term impact these will have on the dollar.
Scandinavian equities remain of great interest to many interviewees, with the economic strength of most Nordic countries coming out of commodities, combined with the fact that, Finland apart, they are not eurozone countries, has stood in their favour.
Japanese equities have also been mentioned as a diversifier and despite the impact of the earthquake and tsunami, Japan’s connections with Asia and China in particular make it a potentially low-correlation addition to the rest of the developed equity markets.
There was a prior pattern which was broadly this: developed markets are providing low returns and their high levels of debt make them unattractive in the long term. Investors move into the largest emerging markets, which have far better fundamentals and improving levels of corporate governance.
However, they are now overpriced and so everyone starts to look for the ‘new’ emerging markets – frontier markets.
Then North Africa explodes and people sell all their frontier positions, moving money back into the now seemingly underpriced developed markets, arguing that this is in any case the best way to access EM GDP strength.
Absolute return vehicles are appealing but they still have a job of trust to achieve. Sophisticated Ucits and hedge funds remain on the periphery for most investors.
Asset managers in Portugal have to compete with banks and the banks are offering very competitive interest rates – on a par with government bonds and similar basic fixed income products – in an effort to get cash and improve their deposits and credit ratios.
In that environment, the main challenge for asset managers is to convince people to pay to take more risk.