10-year bond sale shows ‘broad trend for Ireland remains positive’

The Government’s recent 10-year bond issue was well received by international investors and the 4.15% yield offers a stable multi-year funding programme, says Guy Monson, managing partner of the Swiss private bank, Sarrasin.

“The broad trend for Ireland remains positive. The trend in unit labour costs is improving and the current account is improving so the hope is for more of the same in the future.”

Mr Monson argues that for a comprehensive resolution to the eurozone crisis, all periphery countries will have to improve their unit labour costs which will in turn improve the current account balances of these countries.

At the same time there has to be further progress on an EU banking union, which includes the ability to inject equity into the banking system. Most importantly, the ECB’s outright monetary transaction programme “has to become more than just words”.

“Right now the outright monetary transaction can only be used when a country doesn’t need it.”

He says that the framework should be changed so that outright monetary transaction can be deployed if there is a sudden shock to the system.

When Greece had to be bailed out in May 2010, it was ultimately the bondholders who got burned. In Ireland it was the taxpayer who had to foot the bill for the bailout of the banking system in November of that year. In Spain, the subordinated boldholders were bailed in.

“Now in Cyprus, there is a variation on this and they are making depositors pay. The problem with this is the unpredictability is the big issue. I think investors were more than a little surprised that a lot of the details had to be worked out after the bailout decision had been made.”

And while Cyprus was another headline event, it will have little impact on the real economy, because at a global level central banks are maintaining an extremely loose monetary policy.

Bond yields in many OECD countries are at historically low levels. Moreover, many of the blue-chip corporates can now raise money at levels that were traditionally associated with triple-A rated sovereigns.

This has inevitably prompted speculation that there is a bubble forming in the bond market. Mr Monson argues that US Federal Reserve chairman Ben Bernanke will ensure that there will be a very gradual withdrawal from loose monetary policy, which will prevent a sudden collapse in bond prices.

Moreover, regulatory obligations on pension funds and mutual funds are responsible for many of the flows into the bond markets. However, the longer-term outlook is bearish, so instead of buying protection against a fall in bond prices investors should start allocating more of their portfolios to equities.

US banks are in a much healthier position than their European counterparts. “US banks have done their third set of stress tests with flying colours because they started the process of injecting capital into their banks earlier.” The US housing market is rebounding and the economy is growing.

In Europe, core member state banks do not have a consumer leverage problem, but what they need is growth. Banks on the periphery need another equity injection, he argues.

The biggest challenge will be a backlash against the politics of austerity.

Mr Monson’s investment outlook is a preference for large cap stocks with a focus on technology.

“Not just technology firms but also pharma, engineering, robotics, enzymes, and nanotechnology.”


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