Editor’s note: This article was first published in February 2013. All market data are from then: the Bank of Spain’s 2.75% cap on deposits of more than two years, 3-5% yields on 2-5-year investment-grade Spanish corporate debt, high yield above 6%, and the outlook for equities and emerging markets “this year”.
By Silvia Pazos Vázquez, financial executive at Aspain 11 Asesores Financieros EAFI
Because of the crisis we are in, and the instability of Spanish banking, which needed a bailout to survive, at Aspain 11 Asesores Financieros EAFI we have spent the last five years recommending that investors stay off bank balance sheets and away from sovereign risk, with corporate debt as the main asset in our investment portfolios.
The Bank of Spain has capped the return on “super-deposits” at 2.75% (for terms of more than two years) in an attempt to curb the so-called “deposit war” and control the risk to the solvency margins of financial institutions. We certainly see this as a positive measure that encourages investment in other types of assets. Admittedly, deposits are covered by the Deposit Guarantee Fund, whereas all fixed income, even sovereign debt, carries the issuer’s credit risk.
Although we at Aspain 11 are aware of the rally corporate debt enjoyed in 2012, we believe certain assets still have some room to run this year, even though spreads have narrowed considerably. So investors will need to be selective and analyse the opportunities in new issues as they come to market, choosing very carefully assets that are not trading far above par and that offer reasonable yields in the current environment.
It is worth pointing out that corporate debt is somewhat correlated with the stock market, since it is partly driven by the fundamental analysis of the company. We think 2013 will be a good year for equities, provided current levels hold and nothing destabilising happens on the political front to undermine investor confidence. After what we have seen over the past three days, with volatility on the rise, we consider some profit-taking healthy, and our view is this: “neither does everything sink overnight, nor are we in a free-running rally”. Markets should hold up, though with the volatility you would expect, so we are watching chart support levels and keeping a close eye on all our investment portfolios.
In this asset class we still see opportunities in Spanish companies: Spain is a peripheral country where yields remain attractive and the perception of risk has not yet been properly adjusted. Yields range from 3% to 5% for maturities of two to five years in investment grade (rated BBB or above), while high yield offers more than 6% for the same maturities.
The corporate debt to consider this year, 2013, is debt issued by companies with good fundamentals, such as Abengoa or Telefónica, along with some subordinated debt, for example from BBVA and Santander, with the possibility of a call before maturity. In our view, these two banks will come out of the banking restructuring stronger.
On the other hand, as the Spanish risk premium eases and the situation in our country moves away from the turmoil of the last few days, it will be a good time to consider some sovereign debt, though with great caution, because Spain’s public finances are still in a critical state while we wait for truly stabilising measures that support growth and reduce the public deficit.
Another way to invest in fixed income is through vehicles such as investment funds, whose prospects we see as better because of the range of strategies they can adopt. Now is the time to favour funds with substantial assets under management and acceptable performance measures compared with their peers.
We also favour funds whose portfolios are not purely fixed income, where the manager has some room to manoeuvre to take advantage of market trends or protect against them (absolute return and flexible funds). Among fixed-income funds, we see emerging-market funds as an option: despite their high debt ratios, these countries are beating forecasts. It is true that there are signs of slowing growth in many of them, but in our view there is still room to run during 2013, even if returns narrow compared with 2012. Emerging-market authorities are pulling the cart with expansionary monetary policies that help strengthen their trade balances (always provided inflation stays under control), without forgetting that they are essentially caught up in the famous “currency war”, a beggar-thy-neighbour game whose clear aim is to make their exports more attractive.
At Aspain 11 Asesores Financieros EAFI we advocate independent advice in which respecting the client’s risk profile is essential to building a truly tailor-made solution. In this case, fixed income will weigh more heavily in conservative clients’ portfolios than in balanced ones, always bearing in mind that a tailor-made approach is essential to providing the best financial advice.
Featured image: Javier Perez Montes, CC BY-SA 4.0, via Wikimedia Commons.
