London: Christian Hantel is exactly the kind of investor European companies are wooing as they adjust to a world of diminished monetary largesse.
Foreigners like Zurich-based Hantel at Vontobel Asset Management are snapping up euro corporate bonds thanks to the most favourable hedging costs in seven years – a tidy cushion for borrowers on the potential precipice of another decade of economic stagnation.
All told, HSBC Holdings Plc reckons a net wave of tourist money at 35 billion euros (US$39bil) is poised to replace the European Central Bank (ECB) as the single largest investor – even giving liquid dollar markets a run for their money.
It’s a big bullish claim. And it’s stirring debate in credit circles about how far the region’s issuers can rely on the kindness of strangers to soften the hard reality of political risk and the prospect of a slowdown in corporate-revenue growth.
“We expect a sustained internationalization of the euro credit investor base,” according to HSBC credit strategists Song Jin Lee and Peter Barnshaw in a recent note.
“Barring any resumption of QE, foreign investors will replace the ECB as the single largest net buyer of euro credit.”
But their roadmap faces all manner of political and technical bumps. For one, not even Hantel at Vontobel thinks the world’s investors will follow his example.
Investors chasing favourable hedging costs could leave as quickly as they came, Hantel warns.
“Many investors are very opportunistic,” he said. “If the currency hedge looks favorable, they will buy and if not, they will pull back.”
Hantel, who helps oversee 118 billion Swiss francs (US$117.2bil), is taken by hedging math in favour of euro credit for now, like many of his peers with global portfolios.
But it’s obviously only part the equation; relative credit spreads also drive the investment calculus.
Over the past year, euro credit has largely paid bigger premiums, according to Bloomberg Barclays index data.
European credit markets need new friends. Since 2015, they’ve suffered dwindling purchases from abroad and seen mixed demand at home in the past year.
Even if euro debt is relatively cheap, it’s dogged by patchy trading that may deter those who want liquidity. And America is where all the action is. The average daily trading volume of U.S. corporate bonds stood at US$26.8bil in April, based on Trace data. In Europe, daily trading barely exceeded US$6.2bil, according to market data from MarketAxess.
Political risk in Europe is likely to keep the foreign bid fickle as well. A wellspring of populism underscored results of the European parliament election while Italy heads for showdown with Brussels over its budget. — Bloomberg
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