Europe could prove an appetising hunting ground for bond buyers as monetary tightening begins to bite, according to Citywire + rated Richard Batty.
Batty, who co-runs the €6.6 billion Invesco Global Targeted Returns fund, said a lot of European markets have priced in long-term rate rises.
‘We are seeing monetary tightening from a number of major central banks, or talk of it at least. This could make bond markets vulnerable given the low yields,’ he told Citywire Selector.
‘Europe, however, looks good value to hold in a portfolio. Essentially what we have is an exposure to longer duration rates. In the UK, we think a lot of the bad news on Brexit and the slow down on the economy is priced into the back end of the UK curve.’
‘We are prepared to sell those interest rates, so it’s a long Europe and short UK yield compression idea that we are currently using in the portfolio.’
Interest rates account for 17.8% of risk exposure at present, with broad Europe accounting for 7.9%. The largest risk exposure in the fund by asset type is currency, which accounts for 29.6% of the fund at present.
Elsewhere, Batty also said the team has taken a long position on the global energy stock index to short the commodities idea.
‘Essentially what we have been seeing within stocks markets is quite a dislocation between the winner stocks and sectors like technology, and some of the stocks that have been seen as value traps or unloved.
‘People are finding that energy stocks and the oil majors have very low valuations, pretty high dividend yield in Europe and have underperformed the stock market this year by some considerable margin. This is because other things have done well.
‘Energy companies have underperformed the oil price. So, while some commodities have struggled, the oil price has kept rising and Brent is now around $60-a-barrel and hence up around 8% this year.
‘Oil companies just haven’t kept up with the oil price recovery. We see a valuation argument for these companies that under-reflect the oil price’
Batty said many energy companies have moved from being run for growth to focusing on profit. ‘The management of these companies has changed noticeably in the last two-to-three years. The new CEOs that run these companies are looking more at profitability, than growth, strategies in a world where oil prices aren’t necessarily going to rise.
‘Now it’s more about managing a business more efficiently. We think now is a good opportunity in this market, so we have added exposure in equities via the global energy stocks.’
Over the three years to the end of October 2017, Batty returned 6.48% in the Alt Ucits multi-strategy category, this compares with a 5.95% return from the sector’s average manager, over the same time period.