Mark Dampier: Cautious Snowden is set for a rapid turnaround
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
- 1 What, let gays get married? We must be bonkers
- 2 Rocky Horror star Tim Curry 'suffers major stroke'
- 3 Exclusive: How MI5 blackmails British Muslims
- 4 EDL marches on Newcastle as attacks on Muslims increase tenfold in the wake of Woolwich machete attack which killed Drummer Lee Rigby
- 5 Farewell, Shameless. Your heirs have work to do
BMF is the UK’s biggest and best loved outdoor fitness classes
Get the latest on The Evening Standard's campaign to get London's children reading.
Win anything from gadgets to five-star holidays on our competitions and offers page.
Day In a Page
A modern home of almost 1,000sq ft is close to Stoke Newington's high street. £499,950
A five-bedroom bungalow in Hoveton with riverside garden and mooring dock, £550,000
A refurbished one-bedroom flat with south-facing reception and high ceilings. £579,950
A four-bedroom Grade II-listed house in Nazeing with large gardens. £550,000
A modern four-bedroom house in a converted stable within walking distance to Peckham Rye. £695,000
Three-bedroom house in a quiet residential area within close distance to Battersea Park. £450,000
A three-bedroom cottage within commuting distance of London, Norwich and Cambridge. £250,000
A two-bedroom cottage with a sun room and gardens in South Chard. £350,000.
A three-bedroom semi-detached house with original features including fireplaces and wooden flooring. £399,950
A modern two-bedroom flat split across two floors and close to several public transport links. £595,000
A one-bedroom flat with an open-plan reception/kitchen and private balcony. £315,000.
A bright two-bedroom garden flat between South Acton and Chiswick Park. £499,950.
A listed four-bedroom farmhouse with stables, set in four acres. £500,000.
A three-storey family home with four bedrooms and an extended kitchen/diner. £995,000.
A three-bedroom Hamstone cottage in the rolling Somerset countryside. £430,000.
A luxury one-bedroom apartment on the first floor of a converted Victorian house. £425,000.