Positive outlook in Asia while Europe, UK lag
George Vassos
When it comes to the outlook for bond investing, the Asian story continues to appeal. And the banks are playing a starring role, says George Vassos, Managing Director of specialist fixed income investment manager, Omega Global Investors.
“The Asian outlook is one we have favoured in general for some time, but what has attracted our particular attention is the strong performance in the financials sector, both in itself and also in the way it highlights the headwinds the European and US financials sectors face as they grapple with the recovery, new capital preservation requirements and other issues,” explained Mr Vassos.
“Analysis using our proprietary credit default model shows that despite intensive reforms, most developed world banks have a way to go before they turn the corner. Of course, the Australian banks are the exception to this rule. For various reasons they continue to be among the most profitable in the world, well and truly outstripping most in Europe and the UK. Whether or not that profitability translates to strong returns from a bond investment is of course, another matter.”
Mr Vassos went on to provide more detail about the contrast between the Asia Financials sector and that of Europe and the UK. He also stressed that the Omega ratings process provides different outcomes from that of the traditional ratings houses. This is due to the relatively slow moving nature of the ratings agency methodology – especially when it comes to assessing a fast moving environment which has dramatically changed in shape since events such as the global financial crisis and the surge in growth of the emerging markets’ middle classes.
“An example of this is HDFC Bank from India which we rate higher than Erste Group Bank from Austria. This is despite HDFC being rated lower than Erste by S&P. Our rating is on the back of HDFC having a better capital position and being more profitable. Bear in mind here that the relevant S&P rating was last updated in 2008,” said Mr Vassos.
He also pointed out that not all European banks score poorly, citing Komercni Bank from the Czech Republic as one of Omega’s highest rated banks.
Looking to the US, Mr Vassos called out Citigroup and First Republic, saying “We are happy with the capital position of both, however the poor profitability of Citigroup is cause for concern particularly when there are alternatives like First Republic, which has the same country risk, but is very profitable.”
What all this tells Omega and its investors is that, for the medium term at least, Asian banks are likely to be strong, stable performers. However, that doesn’t mean their European counterparts are out of the game for good.
“We’ll be keeping a close eye on those in the Eurozone and elsewhere because at some point it’s likely that the positive impact of outcomes from Basel III such as beefed up tier one ratios and capital preservation requirements will kick in to their bottom lines,” concluded Mr Vassos. “And we do want to be around to capitalise on it.”
