The same is true for Japan, as we are not yet at the end of the easing cycle, said Michael Krautzberger, head of Pan European fixed income at BlackRock.
Speaking at a press event in London, he said: “We’ll stay in a volatile environment, there’s still so many risk factors, particularly political,” he said. “But the recent volatility in different sectors is an opportunity in Europe.”
“The negative yield we’re in now is not equilibrium. There’s a quicker change from panic to greed than we’ve seen before,” he said.
The ECB is under lot of pressure at the moment, as the fear of deflation is larger than the fear of high inflation while the euro is still relatively strong, in Krautzberger’s view. “Core inflation has actually fallen and is now at 0.7%, he noted. “It’s no surprise that the ECB is in a state of alertness,” he commented. The fact that there was disappointment in December, led many to forecast further cuts by the ECB, he said.
After the last cut of deposit rates in Japan, the market is less convinced that a cut in the deposit rate is the right thing to do. It definitely has some negative consequences,” explained Krautzberger.
Meanwhile, it is not only the central bank that can fix issues in Europe, we need to see action from Europe itself, according to Andreas Doerrenhaus, head of the global unconstrained credit strategies in Europe and a portfolio manager for the global unconstrained fixed income team. “European companies benefit from the “European project” he said, with open borders and mobility of the workforce.”
The profitability of some European companies and banks is an issue at the moment, noted Doerrenhaus. “Companies are focusing on cost cutting, cleaning up their balance sheets, and reducing debt at the moment,” said Doerrenhaus. “But it’s not something that can be solved overnight. If you consider some of the valuations, there are opportunities for investors in the medium term to long term.”
Doerrenhaus said the sweet spot is subordinated Lower Tier two bank securities, while he pointed to high yield as a good opportunity to buy on a selective basis, but urged caution. “Focus on companies with high cash flow generation and stay away from cyclical companies with aggressively leveraged balance sheets,” he said.
