Mark Dampier: Cautious Snowden is set for a rapid turnaround

The Analyst

Last week Stephen Snowden visited our office to discuss the Kames Investment Grade Bond Fund, which he has been running for six months since joining from Old Mutual. Over this time it has not been easy being a bond manager. Those that haven't had most of their assets in gilts have found it tough. However, the fund isn't allowed to invest entirely in gilts as it is predominantly a "credit" fund. This means it has to buy corporate rather than government bonds.

The eurozone crisis has brought sovereign bonds into sharp focus in terms of whether they are really safe. Already we have seen Greece, Portugal and Ireland unable to raise money from the open market at anything other than punitive levels, and there is now a danger Spain and Italy may join them. Yields in the latter two countries have been over 6 per cent, and in the case of Italy they hit 7 per cent, making borrowing prohibitively expensive. If they can't go to the market to raise funds they must go elsewhere and this may include the IMF. The danger is Europe runs out of firepower. The Germans are resolutely against any form of quantitative easing, but the longer this goes on the more likely they will have to give in and effectively print money to continue buying up distressed sovereign bonds.

Unfortunately it looks like the Germans may take this to the brink. If they give in too early, it will seem like profligate countries have been let off the hook, making them less likely to take austerity budgets seriously. This opens up the possibility of the markets taking control and forcing the politicians' hands, which means equity and corporate bond markets may well fall further as investors shun risk assets.

For this reason Mr Snowden has been somewhat defensive, and he has no exposure to the southern Mediterranean banks. He has been watching business confidence indicators turn down as companies delay making investment until they are sure of what is going to happen. It is this paralysis that is likely to cause a recession in Europe and, in turn, the UK. Despite valuations in credit markets looking relatively appealing he believes spreads (the difference in yield between what you can obtain on a government bond and an equivalent corporate bond) could increase further. In other words until he sees further falls in corporate bond markets he refuses to become more bullish.

Yet he has to be careful about being too defensive. He warns that liquidity in the corporate bond market is poor again, in other words it is difficult to buy or sell large positions. So while things might get worse before they get better, when the market turns he believes it will happen quickly and there will be little chance for any bond managers who are sitting in gilts and cash to get on board. This is precisely what happened in 2008 as more aggressive funds sharply rebounded, quickly overtaking those more defensively positioned. He is therefore sticking to his mix of bonds of global companies such as BP, Johnson & Johnson and Petrobras.

So while Mr Snowden is rather negative in the short term, he is sure at some point next year there will be a quick and significant turn-around. He is not alone in feeling that while valuations are cheap they may get cheaper.

Although the fund has a decent yield of over 4 per cent it may be best for investors to phase their way in, rather than buying a big holding in one go. With short-term deposit rates likely to stay very low for the foreseeable future, corporate bonds do look attractive, but I believe it is worth building exposure slowly.

Mark Dampier is head of research at Hargreaves Lansdown, asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

PROMOTED VIDEO
Voices
Oscar Pistorius is led out of court in Pretoria. Pistorius received a five-year prison sentence for culpable homicide by judge Thokozile Masipais for the killing of his girlfriend Reeva Steenkamp
voicesThokozile Masipa simply had no choice but to jail the athlete
Arts and Entertainment
Sister Cristina Scuccia sings 'Like a Virgin' in Venice
music

Like Madonna, Sister Cristina Scuccia's video is also set in Venice

Arts and Entertainment
James Blunt's debut album Back to Bedlam shot him to fame in 2004
music

Singer says the track was 'force-fed down people's throats'

News
i100
Life and Style
The Tinder app has around 10 million users worldwide

techThe original free dating app will remain the same, developers say

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Helpdesk Analyst

    £23000 per annum + pension and 22 days holiday: Ashdown Group: An established ...

    Senior Helpdesk Analyst / Service Desk Co-ordinator

    £27000 per annum + pension, 22 days holiday: Ashdown Group: An established ind...

    Senior Pensions Administrator

    £23000 - £26000 Per Annum: Clearwater People Solutions Ltd: Our client is curr...

    Corporate Actions Administrator / Operations Administrator

    £25 - 30k: Guru Careers: A Corporate Actions Administrator / Operations Admini...

    Day In a Page

    Two super-sized ships have cruised into British waters, but how big can these behemoths get?

    Super-sized ships: How big can they get?

    Two of the largest vessels in the world cruised into UK waters last week
    British doctors on brink of 'cure' for paralysis with spinal cord treatment

    British doctors on brink of cure for paralysis

    Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
    Let's talk about loss

    We need to talk about loss

    Secrecy and silence surround stillbirth
    Will there be an all-female mission to Mars?

    Will there be an all-female mission to Mars?

    Women may be better suited to space travel than men are
    Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

    'They poured water on, then electrified me...'

    If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
    James Wharton: The former Guard now fighting discrimination against gay soldiers

    The former Guard now fighting discrimination against gay soldiers

    Life after the Army has brought new battles for the LGBT activist James Wharton
    Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

    Panic over Ebola threatens to infect the midterms

    Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
    Premier League coaches join the RSC to swap the tricks of their trades

    Darling, you were fabulous! But offside...

    Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
    How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

    How to dress with authority

    Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
    New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

    New book on Ian Curtis sheds fresh light on the life of the late singer

    'Joy Division were making art... Ian was for real' says author Jon Savage
    Sean Harris: A rare interview with British acting's secret weapon

    Sean Harris: A rare interview with British acting's secret weapon

    The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
    Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

    Tim Minchin interview

    For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
    Boris Johnson's boozing won't win the puritan vote

    Boris's boozing won't win the puritan vote

    Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
    Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

    Tim Wheeler: Alzheimer's, memories and my dad

    Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album