LONDON After years in the investment wilderness, peripheral euro zone bonds are shaping up to be one of 2013's most promising bets, AXA Investment Managers said on Wednesday.
With the European Central Bank committed to supporting struggling euro zone members, Franz Wenzel, head of strategy at AXA Investment Management, said peripheral sovereign bonds, particularly Italy and Spain, should no longer be overlooked.
"Government bonds famously called 'safe havens' have given their utmost in terms of returns, and if our baseline scenario in economic and crisis terms is right, we are heading towards the end of the tunnel rather than into the tunnel," Wenzel told the Reuters Global Investment Outlook 2013 Summit.
The Paris-based investment strategist, who supervises allocation decisions on more than 540 billion euros of assets, said Italian and Spanish government bonds were his preferred picks, notwithstanding the uncertainty around Italian elections in March and the high probability of a Spanish bailout.
"Let's assume Italian elections don't go smoothly, what kind of yield level could we imagine? We can even digest a 6 percent yield level for Italian bonds for three months, it will still deliver a decent return," Wenzel said.
"We don't know when Spain will ask for help but our base case scenario remains one where they will ask for help eventually. That would be government credit positive," he told the summit at the Reuters office in London.
Non-European asset managers like Franklin Templeton and Loomis Sayles have been at the forefront of a revival in peripheral euro zone sovereign bonds, particularly in the case of Ireland, where rising demand has driven yields on the 2020 issue down to 4.5 percent, from 8.5 percent at the end of last year.
Spanish and Italian 10-year bonds have rallied since the European Commission rubberstamped a deal to provide 37 billion euros of aid to Spain's banking system and a deadlock was broken on the terms of a Greek debt restructuring.
Spanish yields are now trading at 5.32 percent, some 250 basis points below a July peak, while Italian 10-year yields hit 4.59 percent on Wednesday, the lowest level since February 2011.
Wenzel said the economies of Ireland and Portugal were now reaping the benefits of an extended phase of belt-tightening that started three years ago. However, his bullish stance on euro zone debt stops short of Greece, where questions on debt writedowns, the outlook for growth and the stomach for austerity remain.
While the challenges of budgetary control and fiscal austerity are fully priced into markets like Spain and Italy, the scale of the task facing France to reinvigorate its economy had not yet hit home in some investment circles, Wenzel said.
Extensive labor market reforms and close co-operation with Germany will be crucial in 2013 if France is to avoid further deterioration in economic output and its credit profile after Moody's stripped the country of its prized triple-A rating this month.
"The de-industrialization of France - to change this trend in a matter of years is clearly a challenge, to put it mildly," Wenzel said.
"In a world where growth is really low, it is going to be a real challenge to grow business at home ... But we are convinced that the political set-up has smelled the coffee, that they are doing their utmost to get back on track."
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(Editing by Susan Fenton)
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