It might not be surprising to find that Credit Suisse's Global Risk Appetite Index, which ranges between 'panic' and 'euphoria', was in panic zone last week, but it might be a surprise that not everyone was panicking.
“The notion that people will sell US debt because of [the ratings downgrade] is misguided,” said John Ventre, portfolio manager at Skandia Investment Group, who noted that, post downgrade, yields on US treasuries actually fell, indicating investors still see them as a safe haven.
Structural reasons lay behind this. “The US is the world’s largest bond market and if you have a lot of money and you want to own government bonds then you have to allocate substantially to the US,” Ventre said.
But this doesn’t mean that treasuries are a façade hiding a fatally wounded giant.
BNP Paribas Investment Partners says the curbing of inflation by monetary tightening and lower commodity prices means that even if nominal income growth in the US continues to slow, lower inflation could still give a boost to real incomes and lead to stronger consumption growth. Also, recent US labour market data was better than expected. As well as job creation, average hourly earnings increased “quite strongly”.
In Europe, Skandia’s Ventre noted that as the ECB is purchasing Spanish and Italian bonds until the European Financial Stability Fund (EFSF) is ratified, peripheral markets are gaining the stability they need.
In particular, the EFSF's ability to bail out banks directly is very good news for Spain because if the Spanish sovereign doesn’t have to bail out its banking system then its debt to GDP is one of the lowest in the Eurozone and one of the lowest in the developed world.
“Spanish and Italian yields have now tightened very significantly, and it looks as if stress in this area is on the fade,” he says.
Like BNP Paribas IP, Ventre thinks a full-blown recession remains very unlikely. Ventre flags the strength of the Chinese consumer and points out that corporates are in good shape with strong balance sheets and a lower than usual cost base, meaning profitability is good.
BNP Paribas IP believes that the global economy will “recover somewhat” in the second half of the year and says that it should be borne in mind that the slowdown in the first half was partly caused by temporary factors, such as rising oil prices and supply disruptions.
Rupert Caldecott, CIO of the global asset allocation team at Dalton Strategic Partnership, is another optimist. “Major equity markets, even allowing for some attrition in profit expectations, stand on very reasonable earnings and dividend yields. Significant medium‐term growth disappointments are largely priced in,” he says.
So what of that Credit Suisse index with its dial set to panic? It is Robert Farago, head of asset allocation at Schroders Private Banking, who has been looking at this index and other indices like it.
First, he notes that while economic news has been poor, the Citi Economic surprise index for the G10 economies has trended up over the last month, meaning disappointment is less than it was a month ago, and historically, equities have outperformed bonds while this index is rising.
As for the Credit Suisse index, because it is a measure of investor confidence and acts as a contrarian index, Farago says this implies that we could be close to a buying level.
“The clear buy signal is when it comes out of panic, not when it goes in,” he says, but adds: “so we’re not there yet.”
Nick Fitzpatrick, editor
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