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Financial Year with Finyear


Perspectives sur les marchés obligataires en 2010

Point de vue de Stefan Isaacs, gérant obligataire chez M&G

Economic Outlook
In 2010 we believe interest rates will remain low, core inflationary pressures will be low and the European Central Bank (ECB) will start to unwind the extraordinary policy stimulus that has been used to support the financial system.

Central banks and governments have been successful in avoiding the Depression-type scenario that was feared earlier in the year. However, there is still a long way to go before conditions could be described as normal and monetary policy is expected to remain very accommodative for some time yet. The recovery remains fragile and the combination of a large output gap and low inflation suggests interest rates will remain low. The ECB will want to be sure that the recovery is on solid footing before raising the refinancing rate. We think this may not happen until 2011, in contrast to the market’s expectation for rates to rise in 2010.

The European economy faces significant challenges going into 2010. Rising unemployment levels, tight credit conditions, capacity utilisation rates at record lows and the unwinding of policy stimulus measures are likely to continue restrain growth. Despite these challenges, the improvement in global growth is likely to support exports. This may have the spill-over effect of increased business investment and hiring as businesses meet new orders.

We expect core inflationary pressures to remain muted over the medium term due to excess capacity and weak consumer spending. Firms simply do not have the pricing power that they enjoyed earlier in the decade. There is a possibility that countries such as Ireland, Spain and Greece will raise the value added tax in order to attempt to regain control of spiralling fiscal deficits. This would moderate any deceleration in headline inflation temporarily and hurt a recovery in consumption. Given the poor state of the European labour market, it is unlikely that rampant inflation will be an issue in 2010.

Gouvernment bonds
We are bearish on European government bond yields for 2010. This negative view is entirely due to technical factors, rather than a structural increase in inflation. The continued supply of government bonds that are likely be issued to fund government borrowing over the next couple of years will put upward pressure on yields, particularly once extraordinary stimulus measures start to be withdrawn. A key issue that will need to be addressed in 2010 is the deteriorating state of many EMU countries’ budget positions. Should fiscal deficits continue to spiral out of control – as we have seen in some countries in 2009 – ratings agencies will continue to issue sovereign debt rating downgrades. This will have a large impact on government bond prices for those countries at risk of being downgraded as investors become concerned about the possibility of a government defaulting on its debt. Any signs of economic weakness, or bouts of investor risk aversion, will likely see spreads between German bunds and the debt of ‘peripheral’ nations widen as investors seek the security of ‘safe-haven’ assets.

Corporate Bonds
We believe corporate bonds can continue to provide a good source of returns for investors, particularly as we expect accommodative monetary and fiscal stimuli to continue well in 2010. This is despite corporate bond spreads rallying back to pre-Lehman levels, with a further tightening in spreads likely in our opinion. Flows into the asset class as investors search for extra yield will likely support corporate bond prices going forward. The excellent yield available on many corporate bonds should continue to attract investment in an environment of very low returns for cash.

In addition, companies have been undertaking bondholder-friendly actions over the course of 2009, such as equity rights issues and asset sales in order to de-lever and retire debt. In addition, companies have reduced debt-financed M&A and cut costs. This combination of restructuring and refinancing has resulted in more conservative balance sheets and should help to limit any increase in corporate default rates.

Debt issuance will likely remain strong in 2010 but lower than 2009 levels, particularly as companies bypass their traditional source of funding (banks and financial institutions) in favour of borrowing directly from capital markets.

We believe that careful selection of individual credits will be especially important in the next phase of the credit cycle, in order to avoid stocks and sectors prone to default or decline. This is particularly the case in high yield.

The outlook for banks has improved markedly from 2008, though we remain wary of a possible deterioration in the real economy which may hurt banking profits. We believe that lending to the banking industry can be a good source of returns in 2010 but only in a key group of high quality banks. Large, universal banks that have avoided government assistance with transparent balance sheets remain our favoured way to gain exposure to the banking sector.

A propos de M&G Investments
M&G est l’une de plus importantes sociétés de gestion d’actifs européennes. Fondée en 1901, elle gère près de 185 milliards d’euros d’encours (fin septembre 2009). M&G Investments a pour principal objectif d’optimiser la valeur des actifs de ses clients par le biais d’une gestion active. Cette philosophie se traduit par les remarquables performances de sa gamme de fonds. En mars 1999, M&G Investments a été racheté par le groupe financier international Prudential plc. En février 2001, M&G a commencé à développer son activité de distribution de fonds à l’international en Europe et en Asie. M&G Investments a ouvert son bureau à Paris en septembre 2007.

Jeudi 10 Décembre 2009

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