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Global fixed interest fund managers back pound to strengthen against euro

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The world economic recovery is some way off, but some managers of global fixed income funds see a recovery for sterling against euro fairly soon, according to a survey by Standard &

The world economic recovery is some way off, but some managers of global fixed income funds see a recovery for sterling against euro fairly soon, according to a survey by Standard & Poor’s Fund Services.

‘Most groups do not expect an economic recovery until the second half of 2009 at the earliest,’ says Standard & Poor’s Fund Services lead analyst James Mashiter.

He says Thames River, one of the most pessimistic teams, was expecting the global economy to deteriorate much further. They felt government bonds were still an attractive asset class and were among the most overweight in the sector, with a duration of 8.5 years. 

However, the team at ACP TriAlpha took the view that although the current environment remains supportive to government bonds, most of the rally is over, and so the risks are to the downside. This is why they have been raising cash.

‘On a relative value play, many managers were long the eurozone as the European Central Bank was playing catch-up on rate cuts after an initially hawkish stance,’ says Mashiter.

He says Old Mutual were adding to TIPS, feeling that these offered cheap insurance against inflationary pressures further down the line. A number of the fund managers were bearish on the euro in favour of sterling. Old Mutual’s team thought sterling was oversold and also liked commodity currencies, which they saw as supported by more favourable domestic backdrops.

Thames River thought sterling looked cheap against the euro but believed the US dollar had more or less completed its correction and should under-perform as the Fed continues to print dollars.

Meanwhile, the Newton team were not particularly positive on any of the major currencies but thought the euro had the worst prospects. 

Standard & Poor’s Fund Services found that managers by and large thought spread sectors offered good value.

Goldman Sachs saw the stage of the cycle favouring high quality corporates, mortgage and asset-backed securities. They produced analysis in November 2008 showing that US investment grade credit has a spread implied five-year cumulative default rate of more than 50 per cent (assuming a historical recovery rate). As credit markets typically bottom out three to six months before a trough in economic activity, the team expected to add to high yield and higher beta corporates at that time.

Old Mutual thinks corporate bonds are very attractive in risk-adjusted terms and notes the income provision in a near zero interest rate world. In contrast, Thames River thinks credit is correctly priced and that the liquidity premium will persist for some time.

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