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European fixed income fund managers foresee deepening eurozone recession


European fixed income fund managers believe that the recession in the Eurozone will deepen in 2013, says S&P Capital IQ’s Fund Research in its latest sector trends paper.

S&P Capital IQ Fund Research interviewed European fixed income fund managers in the last quarter of 2012, finding that the general consensus was that Europe, as a whole, would remain in recession throughout 2013. A key observation made by many was that Germany could experience an economic slowdown due to its export-led market faltering under reduced demand from Europe and China.
Many of the managers also felt that Spain and Ireland’s deficit targets were unrealistic, commenting on the large amount of Irish sovereign debt owned by Franklin Templeton’s Michael Hasenstab, who was widely reported to own around 10 per cent of the country’s outstanding debt. Some managers felt his aggressive purchasing of the bonds was the reason behind Ireland’s good performance in 2012.
Fund manager Thomas Kristiansson from SEB Asset Management has concerns with regard to the bubble in the Dutch housing market. This was echoed by Fidelity’s David Simner, who highlighted the large amount of interest-only mortgages in the Dutch market. German and Dutch managers such as Delta Lloyd, Kempen, Gerling and Zantke were the most bearish among our peer group. They were particularly negative in their outlooks for 2013, with many constructing defensive portfolios in preparation for a year of weak global growth and recession in the Eurozone.
According to the fund managers interviewed, France’s woes are set to continue well into 2013. Hubert Lemoine of Schelcher thinks that France’s fiscal problems will persist due to the government’s policy of increasing taxes and avoiding spending cuts. Lemoine was also concerned that France, due to lack of reforms, will be left behind, as its European neighbours implement reforms. BlueBay’s Raphael Robelin believes that French companies will struggle more than corporations in other European countries during a recession, and Stefan Isaacs of M&G highlighted poor domestic demand. Mark Brett, Capital International, expects that the French economy will bump along for the next five years. BlackRock’s Michael Krautzberger predicts that European yields will be volatile for a prolonged period, while his colleague Tom Mondelaers also thinks 2013 will be volatile but expects positive returns.
“Importantly, the fund managers we spoke to think that ECB president Mario Draghi is doing a good job, and the political landscape in Europe is more stable,” says Alastair Wainwright, S&P Capital IQ fund analyst and sector head, European fixed income.
Parvest’s Eric Plantier thinks that this is the first time a solution for Europe has looked viable across the political landscape. He felt commitment from the ECB, teamed with new banking regulations, was a game changer. David Leduc from BNY Mellon does not think a major bear market is due in core European fixed income, and core sovereign yields could come in more. BlueBay’s Robelin felt that, going forward, there are more investment opportunities in Europe than in the US.

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