The eurozone is pulling further and further away from the financial crisis with confidence increasing for businesses and consumers, Franklin Templeton says in its outlook statement.
Just as in Japan, the employment figures and a pick-up in exports are other reasons for optimism in the region.
Three rate hikes are expected from the Fed this year. This does not dim Pictet’s enthusiasm for equities, with Paolini predicting that real interest rates in the US, Europe and Japan will stay negative for some time.
Higher growth than expected is a backdrop that is usually pretty good for corporate profits, but could prove to be a headwind for rates and bonds.
“We don’t like bonds, we don’t like credit,” says Pictet Asset Management senior investment manager Andrew Cole.
“We still think there is room for earnings surprises, but it is in the parts of the market that are more geared to nominal growth.
“All of the parts of the equity markets that look like bonds, such as utilities and telecoms, look pretty expensive to us. Tech, financials and materials look as if there is room for a positive earnings surprise.”
Paolini agrees. “The era of making easy, low-risk money from bond investing is now over,” he says.
“Yields are heading higher, as rising inflation and solid economic growth leads into a gradual tightening of central bank policy.”
Paolini warns against moving higher up the risk curve saying that high yield’s weaker credit profile means that it is often the first to show signs of stress.
EMERGING ASSETS
When it comes to corporate bonds, European and US paper are expensive and it appears that the emerging markets is the place to hunt for better prospects thanks to an inflation-free recovery.
Finisterre Capital puts the average local currency emerging market debt yield at 6% this year, beating the 5% for external debt. Russia stands out, according to Paolini, who has seen bonds yielding 7.5%. Assets in the country are benefiting from high real return rates, falling inflation, a rising oil price and a cheap currency.
“Most EM currencies are trading well below their fair value,” Paolini says. “That puts local currency EM bonds in a strong position to benefit from the expected gradual depreciation of the US dollar.”
