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Low interest rates and Strong Euro

September 4, 2012

With interest rates still close to zero, there are not many reasons to run after hard currency strong government bonds today.  That’s why the issuance of corporate, high yield and emerging market fixed income instruments are important to watch. Industrial companies with sound cash flows will lead the dance. Among those, “emerging corporations” are even more interesting as those Russian, Indian, Brazilian, Turkish, Mexican, Indonesian multinationals are the best contenders to take advantage of growth in both their home markets and the developed countries…Provided there was growth of course.

In the same spirit of mind, I am also attracted towards good quality high dividend stocks, which, with battered share prices for the last two years, look very much like fixed income products with upside potential. It is time to reconsider some good cyclical stocks, in retail distribution, utilities, construction materials or engineering.

In search for performance and yield, I had looked at banks but didn’t dare investing in them. Meanwhile, subordinated junior fixed income could make sense as their higher equity prices, as seen in August, built a thicker buffer at the end of the liability spectrum. Subordination of debt remains a good means of strengthening balance sheets. Offered yields should reflect cautious and “niche” demand. Also, it may well be time to reconsider securitisation, which was put on the side since 2008. It remains a very clever and exciting tool and I cannot imagine that its pricing will not properly reflect its eventual risk. Rating agencies will have to sharpen their pen, not to make the same mistakes as in 2008 by throwing AAA/Aaa’s at them.

The Euro is stronger and it looks as if it will keep on strengthening. It is not surprising given the European recent news and the agenda of the next couple of weeks. At least, many shorts would have been covered.

Today, Bulgaria doesn’t want to join the single currency…that is one less stress, and they get out strong of their declaration.

The ECB will detail its intervention plan on Thursday 6th. Whatever comes out of it: any decision is better than no action.

Elections in Holland (12 September), even if they are inclined towards populist anti-Europe slogans will not jeopardize their commitment to the currency.

On the same day, the Karlsruhe Court will state if the European Stability Mechanism (ESM) is constitutional in Germany…or not. In both cases, this should be either a stable or a stronger Euro.

European Finance ministers meet in Cyprus on 14-15 September.  Besides brushing over the Greek crisis, they will discuss helping the Cypriot banks. I have my opinion on that: It’s only Russian offshore money. Don’t bother.

The agenda also mentions A European Banking Supervisory System, as well as help for Spain (where I think the danger is actually bigger than expected with a few regions able to go bust and take-not only Spanish-banks with them in their fall) – More on that soon.

All these are Bullish for the Euro in the coming fortnight. We undo the hedge against USD.

From → Markets view

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