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Tuesday, 24 October 2017

Peters: Bunds v Clogs; and Mutti's maths

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While I truly do believe that the “real economy” is beginning to heal from the bottom up, the top line stuff remains horrid. The most recent whipping boy is, believe it or not, the Netherlands.

Anthony Peters, SwissInvest Strategist

Once seen as part of the hardest of the hard core of the eurozone, it too is now seeing its fiscal discipline crumble and, if its own officials are to be believes, things are about to get worse rather than better.

Although the 10yr spread between Bunds and “clogs” broke north of 60bp during the darkest days of the eurozone crisis when the bid for anything German went stratospheric, Dutch State Loans have broadly traded close to their German peers.

The oldest rule of investing has to be “If in doubt, stay out”. It is along those now famous side-lines that most of the buy-side seems to be congregating.

However, as news from The Hague begins to become less friendly, that spread which has mainly stuck between 25bp and 40bp over the years and which rather reflected the lower market liquidity than any fundamental economic difference between the two neighbours has moved back into the 60bp area.

This is not to be taken too lightly because it demonstrates how the group of the fiscally virtuous which surrounded Germany is melting away and I am again hearing voices in the market talking about Germany being the most obvious candidate to be first to can the Euro.

Merkel’s call for unity

Mutti Merkel has been particularly and unusually vociferous in her calls for solidarity. Just yesterday she is reported to have said at an event in Bielefeld: “The euro is something that is making European unification irreversible,” and she went on:

“In the final analysis, we are fighting for it because we are living in peace for the first time in decades.”

Fighting talk but I’m not sure that her maths are correct. “The war” ended in 1945 and the Euro was introduced in 1999 – that was 54 years of peace without the Euro – and I cannot see any connection between the fall of Communism in Eastern Europe and the introduction of the single currency.

In fact, there is probably more stress between the nations that make up the EU now than there has been at any time since Charles de Gaulle said “Non!” to British membership in 1967. Is Merkel grabbing at straws?

So, while the economy does seems to be gently recovering from the bottom up, those millstones of fiscal issues remain largely unresolved. It is in this environment that money managers are obliged to take decisions which cover two key needs, namely to beat a benchmark on one hand while preserving capital on the other.

The oldest rule of investing has to be “If in doubt, stay out”. It is along those now famous side-lines that most of the buy-side seems to be congregating. Judging by what we see from here, it also looks to be where they will be staying for the foreseeable future.

However, it is in this unstable world that the best of opportunities can be found and the time is coming for pension fund trustees and insurance company boards to give their PMs a bit of a freer rein and the chance to take advantage of many of anomalies which present themselves every day.

Switch du jour: sell belts, buy bracers.

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