A roundtable discussion at the Fonds’14 conference in Zurich saw leading bond managers from PIMCO, T Rowe Price, Swiss & Global Asset Management and Franklin Templeton split on the outlook for Europe.
Michael Della Vedova, senior bond manager at T Rowe Price, argued investor expectations for a growth spurt were misguided and could potentially be damaging for the long term.
Della Vedova said: ‘We are in a situation where we have got low growth and, as an investor, I think that is a good thing for the region, as we don’t want too much growth.’
He added that, while growth is a good thing in general, it needed to be considered in the context of a sustained, long-term recovery in Europe and, most notably, the indebted states within the eurozone.
‘Like most things in life and in the markets, it is about everything in moderation. It helps nobody if things grow too fast and destabilise the potential for a longer, sustainable recovery.’
‘A longer recovery will include the ECB, which has a toolbox available. I do see the central bank playing an important role when it comes to growth.’
This view drew a contrary argument from Enzo Puntillo, who is head of fixed income at Swiss & Global Asset Management.
‘Europe doesn’t need too much growth? I am surprised to hear that because that is exactly the problem it is dealing with. For ten years there has been stagnation in the region.’
‘Growth is exactly what we need and it won’t just happen by hoping, we are going to need to see structural reforms take hold and I would argue growth is the solution, not part of the problem.’
Nominal growth expectations
Puntillo received support from PIMCO’s Andrew Balls. The European bond manager, who was recently appointed to a deputy CIO role, argued that in spite of greater stabilisation of the eurozone crisis, real and nominal yields remain too high in Italy, Spain and other peripheral economies compared with their real/nominal growth rates.
‘If you look at Italy and Spain, despite their efforts, the nominal yields are well above nominal growth outlook and that needs to be addressed.'
‘We are overweight the European periphery at the front end of the curve, looking at 3-5 year parts of the curve,’ he said.
‘To increase our position anymore I would want to see much more encouraging growth rates. But I cannot see that at the moment because Italy and Portugal haven’t grown for a decade, while Spain is a more optimistic but growth remains low.’
Balls reiterated: ‘We need to see growth above the nominal interest rate this year to ensure real efforts are being made to reduce the debt burden.’