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Standard Bank sees positives in several financial markets in February

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Several financial markets performed well in February according to the latest monthly market commentary from Standard Asset Management.
Several financial markets performed well in February according to the latest monthly market commentary from Standard Asset Management.

US Treasury and German Bund yields rose as hawkish comments from both US and Euro-policymakers seemed to indicate more rate rises in the period ahead. Emerging Market debt made strong returns as Latin governments announced several bond buyback initiatives, and the High Yield asset class was firm, but GMAC bonds struggled as it appeared that the sale of GM’s majority stake may be delayed

Commenting on the market, John Cleary, CIO, Standard Asset Management, said: ‘Equities were supported by strong corporate earnings, including double-digit earnings growth on average for the S&P 500, and by congressional testimony from new Federal Reserve Chairman, Ben Bernanke, which appeared to retain continuity with Alan Greenspan.
‘US Treasury yields rose as investors priced expectations of future rate rises following US data which seemed to indicate continued economic growth with high resource utilisation levels and hawkish comments from Mr Bernanke. European bond investors were also fearful of higher interest rates from the European Central Bank.

‘Venezuela, Brazil and Colombia all announced that they will buy back a significant portion of their remaining Brady bonds, which spurred further emerging market debt spread compression. Brady bonds are repackaged debt issues – promoted by Nicolas Brady, former US Treasury Secretary in the early nineties – that were that were designed to solve the financial crisis in Latin America after a number of commercial banks defaulted on their overseas debt.

‘Looking ahead, we remain positive over the fundamentals in emerging markets. GDP growth in the developing world is expected to top 5.5% during 2006, commodity prices are set to remain high and there is a healthy credit rating upgrade pipeline in the year ahead. We might see some volatility in the asset class as the Latin American presidential calendar progresses but fears that the region was moving sharply to the left have abated after some market friendly rhetoric from Mexican presidential favourite AMLO.

‘Our principle concern primarily surrounds the currently overstretched valuations in the broader emerging market bond universe. Although, as discussed above, we are positive on the fundamentals, we believe that the significant interest in our asset class has pushed spreads to unsustainable tight levels. We are therefore examining opportunities in lesser-known countries. Performance in the period ahead will, however, remain dependant on future US interest expectations and potential inflation worries.’

Commenting on the high yield market, Kam Tugnait, Head of High Yield at Standard Asset Management said: ‘Our asset class was firm in February as demand for the asset class remained healthy against a backdrop of limited new supply. New bonds in the European market included new issues from Italian car-maker Fiat, Spanish cable operator ONO and South African engineering concern Savcio. High yield heavyweight GMAC (General Motors’ finance arm) sold off as investors reacted to speculation that General Motors might delay the sale of its majority stake in GMAC.

‘As we enter the year-end reporting season for many high yield companies, we are cautiously optimistic on the outlook for our asset class. The pipeline of new supply appears to be manageable, the global economy continues to register above trend growth and rating agency Moody’s predicts that default rates will remain low in the coming months. Having said this, we are vigilant over the impact of potential inflation and future rate rises.’

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