Monday 23 April 2018

Goodbye, Mr Bond, who says Ireland is no longer in distress

Michael Hasenstab, chief investment officer of Templeton Global Macro. Photo: Bloomberg
Michael Hasenstab, chief investment officer of Templeton Global Macro. Photo: Bloomberg

Marius Zaharia

Franklin Templeton's Michael Hasenstab, who bought 10pc of the Irish bond market after the country was bailed out, said yesterday he had exited his Irish position, but that the bonds should continue to perform well.

Hasenstab said the recent under-performance of Irish bonds was "short-term noise", praised the country's "strong" economy and dismissed any lasting fallout from the Brexit debate.

"Irish yields deserve to be more in line with core European yields," said Hasenstab, who made big profits on his 2011 Irish bet, which he made when the country was locked out of financial markets and its 10-year bond yields peaked around 15pc.

Now fast-growing Ireland has hefty cash reserves, easy access to markets and borrowing costs of less than 1pc, comparable with those of France, the Eurozone's second-largest economy.

But the gap between Irish 10-year yields and benchmark German Bund yields has widened by almost 20 basis points in less than a month. The bonds underperformed their Spanish, Italian, Belgian or French peers, whose yield spreads over Germany have widened less or even shrunk.

Traders and analysts blame the uncertainty surrounding the upcoming election here and an impending referendum that could see Britain, one of Ireland's biggest trading partners, leave the EU. Major funds, such as Aberdeen Asset Management, have exited overweight positions in Irish debt.

Hasenstab did not comment on the upcoming General Election, which opinion polls suggest may leave Taoiseach Enda Kenny's coalition short of an overall majority.

But, in emailed answers to Reuters questions on risks to Ireland associated with the Brexit debate, he suggested the Irish bond market should not be affected by Britain holding a referendum, probably later this year, on EU membership.

"Ireland is a strong member of the euro zone and we have every reason to expect that to remain, regardless of potential developments in the UK," Hasenstab, CIO, Templeton Global Macro, said.

"Ireland's fundamentals remain strong and this will be the driver of bond market performance."

Ireland used to be lumped together with Portugal, Spain and Italy, which together make up the Eurozone periphery. Irish yields are now one-third of Portugal's.

Now Hasenstab and others in the market compare it with the "core" group of euro zone borrowers - France, Germany, the Netherlands, Austria and Finland. Fitch is reviewing Ireland's A-minus credit rating and some analysts say an upgrade is possible.

Ireland implemented tough austerity measures in exchange for financial aid from the International Monetary Fund and its Eurozone partners during the financial crisis.

Since then, the economy has rebounded, growing around 7pc in 2015, the fastest rate in the bloc.

Hasenstab's flagship funds have sold their Irish government bond holdings. The Templeton global bond fund, which held the Irish position and is part of Templeton Global Macro, manages assets worth $53.2bn.

"Our flagship strategies have exited our investments in Ireland. This is not due to any concern over fundamentals in Ireland, but rather the investment thesis played out and the country is no longer in distress," he said.

"Quite simply, we are finding higher total return opportunities elsewhere in the world."

Among those opportunities, he mentioned Mexico and Indonesia, where the economic fundamentals were strong, although their currencies were trading at historically low levels.

Hasenstab said both countries should withstand rising interest rates in the United States and recover once markets stop "over-reacting to what is happening in China and oil prices".

"Conversely, we are avoiding countries with comparatively weaker fundamentals, like Turkey and South Africa," he said. (Reuters)


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