Friday’s crash on the stock market left fund managers reeling. Many stock market indices were down more than 10 percent. Normally financial managers would use the opportunity for cheap deals in the market. But few have dared to put their heads above the parapet. And almost no one is predicting a quick turnaround in the market.
The talk is of a post-Brexit flight to safety. But few asset classes are considered safe in today’s perilous political and economic circumstances.
“It is still much too early to come out in favor of equities,” said Henning Gebhardt, fund manager at Deutsche Asset Management, whose mixed funds now have equity allocations as low as 25 or 30 percent. But some bond classes are also unpopular, with ultra-low and negative yields scaring off many fund managers.
When all else fails, the market turns to cash and gold, two of the biggest safe havens from instability. “In recent weeks we’ve raised our cash allocations from 2 to 5 percent,” said Jens de Vries-Hippen, manager of the share fund Allianz European Equity Dividend. He is not alone in doing so. A Merrill Lynch survey recently showed that, around the world, funds are holding more cash than at any time this millennium.
“Investors were incredibly relaxed about Brexit, the real risk had not been priced in at all.”
Cash may preserve value but it offers little growth. It is a different story with gold, at least since the beginning of the year. Cologne-based investor Bert Flossbach runs the mixed fund “Multiple Opportunities.” He claims to have survived Friday’s market tsunami with less than 1 percent losses, not least thanks to a gold allocation of over 14 percent. Holding no bank stocks – the day’s worst losers – also helped minimize his losses.
Many investors were blindsided by the referendum result. At the end of May, a survey of large investors by market research firm Sentix revealed that only 9 percent had made plans for a British rejection of the European Union, although the polls already showed the contest neck-and-neck. According to Patrick Hussy, the boss of market research firm Sentix: “Investors were incredibly relaxed, the actual risk had not been priced in at all.” Even now, investors hadn’t grasped the real risks, he added.
Shares aren’t completely off the table, however. Some hardy souls are daring to go back into the market.
Mr. Flossbach said he made some cautious purchases of heavily devalued shares. But buyers are either taking a long-term view, or have some very specific goal in mind. Uwe Rathausky of Acatis Gané Value Event Fonds was one, picking up stocks like Grenke, Munich Re, Hermès and Nestlé at what he regarded as bargain prices.
Even with very low yields, the bond market still presents something of a safe haven for investors. But not all bonds are equally in demand. German government bonds are still popular, a couple of weeks after their yields turned negative.
The surprising British “No” has led many to again buy the comparative safety of Bunds, pushing yields still lower, at one point down to -0.17 percent on a ten-year bond. Sith the European Central Bank continuing to purchase €80 billion ($13.3 billion) of bonds every month, including around €12 billion of Bunds bought last month.
DZ Bank said it expects yields on 10-year Bunds to fall to -0.25 in the next three months, meaning the prices of these government bonds will continue to rise.
The yield on U.S. Treasury bonds is at least still positive, thanks to a better economic outlook and hope of rate rises from the Federal Reserve, promised since at least last December. But here too, the referendum result meant falling yields as risk-averse investors looked to safety. At 1.4 percent on a ten-year U.S. government bond, yields were lower than at any time in the past four years.
Bonds from southern European nations were watched carefully, partly to see if the Brexit decision might reignite the smoldering euro-zone crisis. “Brexit,” after all, comes from the term “Grexit,” the possibility that Greece might be pushed out of the currency and even the European Union, a scenario seen as probable by some in 2012 at the hight of the country’s debt crisis.
Not great, but not bad: this was the overall verdict on sovereign bonds from the shaky economies of Europe’s southern flank. Yields on Italian bonds climbed, with their premium over German government bonds at its highest since last fall, at around 1.6 percent. For Portuguese bonds, the premium over Bunds rose to 3.4 percent. Spanish yields fell slightly, buoyed by the good showing of the conservatives in the weekend’s Spanish elections.
“It could be some time before investors feel confident enough to re-enter the market for high-risk bonds.”
The premium of southern European sovereigns over German bonds is several percentage points lower than in 2012, when ECB president Mario Draghi announced the bank would do whatever was necessary to support the euro. The ECB’s subsequent €80 billion monthly bond-buying program has provided firm support for bond markets in these countries.
Bernd Hartmann, head of investment strategy at VP Bank, said the euro debt crisis was unlikely to “boil over” again for the foreseeable future. And in spite of populist politics, for the moment no other country seems ready to follow Britain down the path of exit.
Among corporate bonds, even many blue chip companies are not generating high yields: on average, they are under 1 percent. Friday saw a small increase in risk premiums – to about 0.15 percent – as well as in insurance on credit defaults, up around 0.25 percent. There is more consensus on corporates than on almost any other asset class: experts are confident they will maintain their value, in particular bonds which are part of the ECB buying program, expanded since June to include some corporate paper.
Srikanth Sankaran, a credit strategist at Morgan Stanley, said the ECB would likely expand the program, offering more buying opportunities. Jim Cielinski, head of bonds at the investment fund Columbia Threadneedle, said he remained optimistic on corporate bonds, not least since there is growth left in the global economy.
High-risk European corporate bonds are a different story, however. After a rally in recent weeks, average yields jumped on Friday, up half a percentage point to 4.7 percent, with credit insurance also distinctly more expensive. The ECB bond purchase scheme does not extend to these high-risk vehicles. “It could be some time before investors feel confident enough to re-enter the market for high-risk bonds,” said Mike Della Vedova, a fund manager at T. Rowe Price.
Mr. Sankaran at Morgan Stanley was also skeptical: “It is very hard to say where the market will go with high-interest bonds.” Friday’s fall after the recent rise in prices showed just how jumpy the market was, he added.
Ingo Narat is an editor with Handelsblatt’s finance section. Andrea Cünnen works at Handelsblatt’s finance desk in Frankfurt, reporting on the bond markets. To contact the authors: email@example.com, firstname.lastname@example.org