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The market for European high-yield products offers interesting niche segments.
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The market for European high-yield products offers interesting niche segments
Plus sign for the Italian banking system and medium-sized companies, which can generate returns of around 4%.

by Francesca Vercesi | 02 September 2015

Significant crises, volatility and low returns. How should investors behave? Francesco Castelli, manager of Banor Sicav’s Euro Bond Absolute Return fund, shares his views with readers.

Are the shocks experienced by the markets in the week just ended the result of an increased aversion to risk or are we witnessing currency wars or global recessions? Can we describe them as the after-effects of a debt overdose? The epicentre of this summer crisis is China. From there, the shockwaves spread to the emerging countries (affecting both shares and currency markets), to raw materials and to stock markets in general. If we disregard emerging bonds, the behaviour of the bond market was reasonably calm: we saw government bonds rise and losses limited to a couple of percentage points in the high-yield segment. Bonds had already suffered sharp adjustments in April-May and operators’ position was undoubtedly less unbalanced this time round.

What’s your reading of events in China? The robust adjustment of the Chinese market reflects a GDP growth that is probably lower than shown in the official statistics. Domestic consumption is still too low. And the reduction in external demand is an unwelcome signal for the global economy, which for years has been using China as its principal supplier.

What does that mean for savers, in concrete terms? For our clients’ portfolios we’re keeping to the same prudent approach we recommended a few months ago; any increase in risky positions needs to be made with a great deal of discipline and in very small steps.

As we wait for the storm to die down, many operators are suggesting that investors should concentrate more on European assets, especially if we’re talking about corporate bonds. What do you think? What’s your asset allocation? As far as bonds are concerned, the adjustment was, as I mentioned, relatively limited. We’re still convinced, sadly, that fixed income products do not at present offer a particularly attractive risk/return combination.

However, the market for European high-yield products still has some interesting niche segments, with two in particular that we find particularly appealing. One is the Italian banking system, in these early stages of a consolidation process that will increase its strength. And the other is medium-sized companies that the big investors don’t always know about and which can generate average returns of about 4%, albeit with a very limited duration.

 


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