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Smart choice: bonds and the euro
by Jesmond Mizzi
European bond issues have risen dramatically over the past
two years, causing the number of euro-denominated deals to increase
substantially, in terms of volume and currency chosen. Deutsche
Bank reports that the volume of euro deals leapt from 43 per
cent in 1999 to 59 per cent last year.
Just 18 months ago, the spread of European bonds in the marketplace
was seriously limited. The issues in circulation were dominated
by the telecommunications industry, and that trend continued
into the early part of last year. But since then, other sectors
have been increasing their capital base through share issues,
and the market has been greatly diversified.
Maltese investors, who have favoured sterling predominantly,
would be well advised to diversify into the euro. It has fallen
from 2.43 to 2.53 against the Maltese lira since last December.
The Maltese lira basket is more than 50 per cent euro-based,
and if the euro falls further in the short run, the impact would
not be too unfavourable.
Conversely, investments in other currencies, including sterling
and the US dollar – both of which are considered to be
at higher levels at present – could have a greater negative
impact on investors’ funds. So we are advising our Maltese
clients to begin moving some of their sterling funds to the
euro. It is anticipated that, if sterling joins the euro, then
its value would fall. The present value of the euro against
sterling is very low, and Maltese investors should be asking
themselves: “How likely is it that I will need access to
my capital as sterling?” The likelihood is small. Those
future requirements are likely to be better served in the euro.
Even if Malta does not join European Monetary Union, it is highly
unlikely that the lira basket would change in such a way that
would put investors at a disadvantage.
One fund that we are recommending on this basis is the Aberdeen
Euro High Yield Bond Fund, which is part of Aberdeen Asset Management’s
established Luxembourg SICAV range. The portfolio is well diversified.
It currently invests in more than 70 holdings, and is made up
mainly of high yield interest securities, denominated in euro,
and issued
by corporations or government-related bodies.
Government bond issues are declining relative to the growth
of corporate and high yield bond issues. Also, the difference
between yields (known as the spread) currently available from
government bonds, and the yields available from bonds issued
by well-managed companies, continues to look attractive. And,
with average bank deposit rates in Europe, such as German rates
at approximately 3.5 per cent (source: Deutsche Bundesbank as
at 31 March 2001) appearing increasingly unattractive, a fund
like the European High Yield Bond Fund has increasing appeal.
It has an estimated gross distribution yield of 9.3 per cent
and pays an income each month (source: Aberdeen Asset Managers
– yield as at 30 June 2001). This fund also carries a risk
lower than that of funds which invest in equities.
With inflation under control, the long-term outlook for rates
remains low. Against this backdrop, Aberdeen’s head of
fixed interest, who also manages the fund – Paul Reed –
remains optimistic. “Low inflation and low interest rates
are excellent news for investors,” he says, “and though
it is difficult to predict interest rate movements with accuracy,
we do believe that inflationary pressures, in historical terms,
will remain weak. This suggests that interest rates will remain
relatively low.” Aberdeen’s award-winning bond team
is headed by Mr Reed, and numbers 20 fixed interest specialists,
each of whom has, on average, 14 years of investment management
experience. Together, members of the team manage more than 15
billion euros in fixed interest funds (source: Aberdeen Asset
Managers as at 30 March 2001). For those who have favoured sterling
in the past, the time has come to seriously rethink the prospects
of investment in this particular
currency.
Jesmond Mizzi is the investments director and head of sales
at Globe Financial Management plc’s corporate and private
wealth management office.
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