Invesco’s Mark Nash has strengthened his Italian and Portuguese sovereign bond allocations off the back of the bailout extension agreement reached by Greece and the Eurogroup.
The Citywire AA-rated manager said he increased his existing overweight positions in Italy and Portugal in the five year, 10 year and 30 year parts of the curve in his Invesco European Bond fund.
Nash had a three and one percentage point overweights to Italy and Portugal at the end of October, respectively. This has turned now in two seven percentage points overweights in the countries in the fund, which he co-runs with Lyndon Man.
‘We got a bit nervous during the negotiations between Greece and the other European countries, especially after the comments by the German Finance Minister Wolfgang Schäuble. Therefore we slightly trimmed our peripheral exposure’ he told Citywire Global.
‘When the agreement was reached, we added back to Portugal and Italian bonds to capitalise on their yields and the better growth prospects offered by both countries.’
Nash believes the ECB’s policies will support Portugal and Italy, where consumer confidence indicators are slowly improving. He also currently has a 25% overweight in peripheral sovereigns, including Spain, Ireland and Cyprus
‘These bonds will be sought after. Ireland and Spain have done a great job in terms of reforms, while Cypriot bonds offer an attractive yield in a more stable political environment,’ he said.
Nash has a very small position in Greece as he believes that Syriza could potentially back away from the Troika requirements.
Elsewhere, Nash is underweight UK and US sovereign bonds as he expects rates to raise quite soon. ‘We think the Fed will hike rates in September and the Bank of England will probably follow in Q1 of 2016. This is to avoid sterling appreciating too much,’ he said.
QE won’t encourage lending Nash believes ECB’s quantitative easing will strongly support financial markets but won’t spur bank lending to European SMEs. ‘The capital requirements to lend to small and medium enterprises are very stringent. Banks won’t lend until they get some form of capital relief.'
He added the ABS purchase programme could work better in this context but it will take months to be implemented.
Bet on inflation linkers
From a macro perspective, the Citywire AA-rated manager thinks pessimism over global deflation has been overpriced.
‘Last December, we took a long inflation-linked bonds position which worked out really well as the ECB announced it will also buy this kind of bonds and yesterday revisited the European growth outlook on the upside,’ he said.
He favours German, Italian and UK linkers over French ones, as he said they benefit from higher growth prospects.
Over the past three years to February 2015, the Invesco European Bond fund returned 33.95%. This is while its Citywire benchmark, the Barclays Pan European Aggregate index, rose 25.89%.