Bond expert pours cold water on Euro optimism

Colonial First State Global Asset Management (CFSGAM) chief investment officer, fixed interest and credit, Paul Griffiths, joined the group around three months ago after six years as global head of fixed income for Aberdeen Asset Management.

Mr Griffiths told media on Friday that noise and volatility in Europe have made the region close to impossible to manage from a bond perspective, and he doesn’t buy recent optimism around Sunday’s German election, a slight decrease in Greek unemployment, and Ireland's technically emerging from recession.

Greek unemployment remains at around 27 per cent and Ireland’s current growth rate of 0.4 per cent is well short of the sustained 2 per cent-plus growth the nation would require to handle its debts, he said.

Looking at peripheral Europe as a whole, the level of indebtedness in the economy, what is being asked of Germany, the issues in the bond markets there and elsewhere, “I remain significantly concerned,” Mr Griffiths said.

Even if those concerns don’t eventuate, Europe is “only marking time til the next shakedown”, he added.

Mr Griffiths predicted a break-up of the wider eurozone at some point but suggested a ‘core euro’ may remain, with some of the more stable northern European nations. “From an investment perspective that will continue to make bond investing in the sovereign space very tricky, [but] in the credit space potentially less so,” he said.

Uncertainty over quantitative easing (QE), and the tapering thereof by major developed nations, is likely to create continued volatility, he added.

“If we don’t unwind QE properly there is a significant inflationary concern. I have substantial concerns about politicians and central bankers and what drives them. No matter where you are, if you’re a politician with a debt problem, you’re tempted to inflate away a bit of that debt,” Mr Griffiths said.

“From a bond perspective, if inflation gets back into the system then bond yields would react extremely negatively.”

However, he predicted there will be, over the medium term, a grind towards higher bond yields.

“Against that backdrop, we must look to other ways of making sure we structure our products and services to clients to make sure we are effective and diligent custodians of our clients’ money,” Mr Griffiths said. “We need to manage the products we’ve got and also develop new things.”