Monday 19 May 2014 

Amsterdam

In a long brainstorming session with an institutional client we discuss the market environment:

  1. The relentless decline in government bond yields: investors like the dovish message from the US Federal Reserve and expect or at least hope for action by the ECB. We don’t share the interpretation that the bond market is ‘smelling’ a slowdown (equities in any case don’t)
  2. The unsurprisingly unstoppable search for higher yield: economic risk is declining with an economic recovery occurring in a generous central bank liquidity environment so investors like high-yield bonds and emerging debt, which has also seen a big decline in yields
  3. How to prepare for a more hostile environment: apart from doing one’s homework as well as possible, risk overlay is an attractive way of preparing for an increase in volatility. However, for the moment we don’t yet see the trigger for such an increase. 

Tuesday 20 May 2014

Madrid

About every six months I travel to Madrid for client presentations. Speaking with clients afterwards the mood is definitely more upbeat than on my previous trip. Not only did Spain see an attractive increase in hard economic data (e.g. GDP) but anecdotal evidence also shows morale is improving: car sales are on the rise, restaurant visits during the week as well, roads to the beaches are congested at weekends, property prices have bottomed, competition is ferocious among banks to win mandates from good quality SMEs for credit lines (monetary transmission at work).   

Wednesday 21 May 2014 

Brussels

Tomorrow is the first anniversary of Bernanke’s comment about the likelihood of scaling back quantitative easing (QE). One year on, the monthly QE-related buying has been reduced from USD 85 billion to USD 45 billion, 10-year Treasury yields are up 50 basis points, the S&P 500 is up 13% and corporate bond yields are lower. The area where a lasting significant negative impact can be seen is local emerging debt. This is an invitation to take a step back and calm down when everybody becomes so unnerved about some new theme that they overreact. A lot of credit goes to the way the Fed has communicated with the market by first making tapering acceptable, then turning it into a non-event, then shifting from data-contingent forward guidance to more traditional communication, to the point where investors are no longer concerned about the prospect of the first rate hike (at least for the time being). The insatiable hunger for yield is, however, the key explanation. 

In the evening I take a flight to Bologna because I’m speaking at a conference tomorrow in Rimini. In the past I have had interesting experiences in Italian taxis, but this one beats them all. Getting in the car I notice a head-rest cover on the front seat with Mille Miglia printed on it. This can’t be a coincidence: on roundabouts tyres are screeching and in town headlight flashes are repeatedly used to harass other cars out of the way. I understand why Fiat installed bars in the back – to give passengers something to hang onto. Arriving at the hotel I give the driver a tip (“Thank God, we’ve made it”).

Thursday 22 May 2014

Rimini

I’m a panellist in a big conference for investors and financial advisors. There is a discussion on why the euro is holding up so strongly vis-à-vis the dollar. When I say that the euro will only weaken significantly when the US considers it to be in its interest to have a stronger dollar (because of looming inflation risks), there is a lot of rumbling in the large audience: clearly they had hoped to see the euro depreciate faster. 

Friday 23 May 2014 

Rome 

Client presentations on the investment outlook under the heading “Where are the fish?”, i.e. where are the attractive opportunities? A client likes the metaphor and asks “When will the fisherman stop fishing?” Good question but difficult to answer: it seems most investors have difficulty in cutting back risk when they have made nice returns: poor performance causes despair, but good performance fuels greed. 

 

William De Vijlder

Vice – Chairman of BNP Paribas Investment Partners