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Argentina Update—Coming Closer To the End of The Saga

The markets have continued to trade Argentine bonds with caution, ahead of the Supreme Court audience on the Argentina-Holdout case, which will take place on June 12th. We view the possible outcomes as follows: (1) The Supreme Court accepts the petition to hear the case, perhaps reacting to the plethora of amicus curiae that have been presented in favor of the Republic’s case (great scenario for markets), (2) The Supreme Court asks to hear the input of the solicitor general on the possible implications of this case on the sovereign immunities act before making a final decision, an outcome that could stretch the decision timeframe out to 2015 (good for markets), or (3) The Supreme Court just denies the request to hear the case, in that manner exhausting all the possible appeals of Argentina in the US Court system (very bad scenario). If Scenario 3 occurs, the payment of the interest on the 2033 Discounts, scheduled to take place on June 30, would feasibly be attachable by the holdouts. In other words, under the third scenario, Argentina would most likely default on performing debt.

We will not attempt to forecast how the Supreme Court will act, but rather assume an equal weighting to the just-mentioned possible scenarios. Nine months ago we would have assigned 0% probability to the scenario of the Argentine government agreeing to pay full claim to the holdouts in the event of an adverse Supreme Court decision. Now we see an increased probability of the government potentially deciding to pay the holdouts, most likely in kind (paid with additional bonds rather than cash), as was the case with Repsol. As we argued in our “Winds of Change” piece at the beginning of this year, the authorities have clearly internalized that a recovery in the capital account is a necessity for the current economic model to survive, hence their decision to become increasingly pragmatic on the economic management front.

There seems to be an understanding by the authorities that running a current account surplus is not sufficient to keep money demand strong, and that without external financing, the reserve drain will continue (the reason the government elected to pay Repsol and reach an agreement with the Paris Club is tied to the need to reopen external credit lines). Alternatively, if the US justice system forces Argentina to default, the government may decide to call a debt swap for holders of performing debt, so that investors can receive “mirror” bonds carrying Buenos Aires legislation –and in that manner be able to get paid. The problem with this scenario is that the execution of this strategy seems quite complicated from a logistical point of view, and also, the capacity of provinces and corporates to issue in the future under New York law could be compromised.

The bottom-line: While it is impossible to forecast how the US Supreme Court will ultimately act, our conviction view asserts that the interest of a very small minority places at high risk the right of “the many” (in this case 93% of the holders of debt) to get paid under New York jurisdiction. In any case, we continue to recommend investors stay involved in this credit through sovereign USD-denominated Buenos Aires law paper (2015s and the new 2024s, currently yielding an attractive 10.7%) and NY Law provincial debt (BA 2015s and 2021s, for example). We are not lawyers, but our view is that provincial debt should remain immune to the events affecting the sovereign.

Clearly, if the Supreme Court rejects the case, and Argentina’s ability to make the interest payments on the NY Law 2033s is withheld, there will be ample volatility, but we sense that the willingness of the Fernandez de Kirchner administration to continue paying the debt will remain intact. The amortization schedule of Argentina is relatively light (USD $8.3 billion of public debt matures in 2014, according to the official September 2013 Public Debt Update), and Argentina will probably benefit from increased sources of capital account financing following the agreements reached with the World Bank, the Paris Club, and Repsol.

Now, if Argentina loses the case, but subsequently acts pragmatically, i.e. pays the holdouts to keep interest payments from being attached by the plaintiffs, then we think that the holders of performing debt will refrain from suing the Republic (for violating the most favored offer clause included in the 2005 and 2010 covenants). We maintain this view not least because a decision by the Republic of Argentina to finally end the holdout debacle would likely generate a material, unprecedented rally in Argentine debt given the implied capacity of Argentina to be able to issue without problems in New York. Under this “good case” scenario, we would not be surprised to see the NY-law USD-denominated 2033s rally north of $115 (clean price, now trading at $78) if indeed the government is able to clear the problem with the holdouts.

Alberto J. Bernal-León is Head of Research and partner at Bulltick

Mark Haefele Appointed UBS Global Chief Investment Officer

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UBS has announced that Mark Haefele will assume the role of Global Chief Investment Officer for UBS Wealth Management and Wealth Management Americas. Alexander Friedman, the current Global Chief Investment Officer, has decided to step down in order to pursue a new opportunity outside the firm.

Mr. Haefele will join the Wealth Management Executive Committee. He joined the firm in 2011 and is currently the head of the CIO Global Investment Office, reporting to Mr. Friedman. Prior to joining UBS, Mr. Haefele was a managing director at Matrix Capital Management, and before that was co-founder and co-portfolio manager at The Sonic Funds.

Juerg Zeltner, CEO of UBS Wealth Management said, “We are pleased that Mark Haefele has accepted this key role for UBS Wealth Management. Mark is a highly qualified investment expert with a global track record. His management skills and ability to transform his deep market knowledge into relevant information that benefits our clients, make him the ideal successor for this important position.”

UBS plans to further invest in the Chief Investment Office with a particular focus on expanding its capabilities in the emerging markets and Asian geographies as well as in its alternative investing and value-based investing offerings.

Mr. Friedman joined UBS in February 2011 to establish the Chief Investment Office and develop a UBS House View. Today, the Chief Investment Office manages the discretionary and advisory assets of Wealth Management clients worldwide, and provides the firm’s clear, consolidated view on all markets and asset classes.

Under the leadership of Mr. Friedman and his team, a systematic, global investment process has been established that has produced strong and consistent investment results for the firm’s clients during a volatile, post-crisis period. The process comprises the expertise of more than 900 in-house analysts and external experts, and forms the foundation of the UBS House View, globally recognized for its comprehensive and effective investment insights.

On the departure of Mr. Friedman, Mr. Zeltner said: “We are grateful to Alex for his exceptional leadership in creating a strong CIO team and running a world-class investment organization that has produced excellent results. He did a fantastic job and we wish him much success in his future endeavors.”

Millionaires Reveal their Top Five Past Investing Mistakes

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The top five most common mistakes made by millionaires are failing to diversify, investing without a plan, making emotional decisions, failing to review a portfolio, and placing too much focus on previous returns, finds a poll by one of the world’s largest independent financial advisory organizations.

In the global deVere Group survey of 880 high-net-worth clients, when asked to reveal their number one investing mistake before seeking professional advice from deVere, 23 per cent cited failing to adequately diversify their portfolio. 22 per cent responded investing without a plan, 20 per cent said it was making emotional decisions, 16 per cent answered failing to regularly review the portfolio, and 14 per cent claimed it was focusing too heavily on the history of an investment’s returns. 5 per cent cited other errors, including impatience, investing near the top of the market, adhering to recommendations from acquaintances, and paying tax on the investments unnecessarily, amongst others.

Those polled by the organisation, which has more than 80,000 clients worldwide, are based in the U.K., the U.S., South Africa, Hong Kong, Japan, the UAE, Indonesia and Thailand and have investable assets of more than £1m.

Of the survey, Nigel Green, deVere’s founder and chief executive, observes: “Interestingly, there are minimal differences between the top five most common investment mistakes previously made by high-net-worth individuals. This close weighting could suggest that, according to the respondents, all of them are almost equally as significant and costly – and therefore must be avoided.”

On the breakdown of the poll, he continues: “As the survey highlights, failure to diversify a portfolio is widely regarded as one of the most common investment pitfalls. Spreading your money around is a vital tool to manage risk. However, it must be used correctly. Diversification will only add real value if the new asset has a different risk profile.

“The poll underscores how 22 per cent of today’s millionaires have also in the past fallen into the all-too-familiar trap of randomly investing, or investing without a structured, robust plan. Anyone who has an investment plan can expect their portfolio to outperform those without a plan. To my mind, unless you have a sound investment plan you are gambling, not investing.”

“Most decisions in life are emotional to some degree but making excessively emotional decisions can prove deadly when it comes to investments because they are blighted by prejudices and biases. Working with an independent financial adviser is one recommended way to help take excessive emotion out of the equation.”

“16 per cent of respondents cited that failure to review their portfolio on a regular basis was their number one investment mistake. This is not surprising as even the best portfolios can go off-target over time. Investments need to be reviewed and potentially rebalanced at least annually, preferably more often, to ensure they still deserve their place in the portfolio and that they are still on track to reach your long-term financial objectives.”

“Additionally, high-net-worth individuals told us that they have in the past been caught out by relying too much on historical returns and not giving enough importance to future expectations. The future investment situation is likely to be different from time-aged averages. Past averages may have little bearing on the current environment and therefore the actual returns you receive.”

deVere Group’s CEO concludes: “Mistakes investing can and do occur – it is how they are best avoided, or at least mitigated, that is the key to success. Learning lessons from people, like those we polled, who have overcome these common investment mistakes to go on to accumulate significant wealth in the longer-term is a way to reduce costly errors.

Due to the complexities of investing and the potentially devastating effects of committing expensive avoidable errors, the best thing to do is to seek advice from a professional independent financial adviser who will help circumnavigate the common and not-so-common pitfalls. Avoiding just one of these mistakes – and there are many others – can literally make the difference between poverty and financial freedom, says Green.

Growing Hardy Inflation Hedges With Natural Resource Equities

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Foto: Historias Visuales, Flickr, Creative Commons. Cómo protegerse en las carteras de la subida de precios con bonos ligados a la inflación

The era of easy money in the U.S. is coming to an end. The Federal Reserve has cut its quantitative easing (QE) program of bond purchases by $10 billion at each of its last three meetings. The current pace of tapering suggests that QE will reach zero in just a few more months and some observers even expect the fed funds rate to rise in the spring of 2015.

According to Robin Wehbé, Portfolio Manager of Global Natural Resources at The Boston Company AM (part of BNY Mellon), this combination of events reinforces his belief that interest rates bottomed last summer, as investors reacted to the planned reduction of QE measures worldwide. “Years of QE have lulled many investors into complacency about the central bank’s actions, but Fed Chair Janet Yellen’s comments indicate that a rate hike is less than a year away. Those comments are feeding fears of impending inflation as the effect of QE shifts from providing stimulus to creating excess liquidity”.

Higher rates point to a strengthening U.S. dollar, which will effectively export inflationary pressures throughout the world. Most of the world’s commodities— not to mention many other goods and services—remain priced in U.S. dollars. If a relatively healthy economic outlook prompts U.S. rates to rise more quickly, the dollar will strengthen against other currencies and exacerbate those inflationary pressures.

This dynamic will be most apparent in countries with current account deficits, and it has been blamed for much of the sell- off in emerging-market equities during the past year.

Not surprisingly, investors are seeking ways to hedge their portfolios against this likely rise of inflation. Commodities are typically the first tools they reach for. Many investors believe that hard assets such as oil and gold outperform traditional securities such as stocks and bonds in times of high inflation. However, this is not necessarily the case. “We believe that their relative performance shows that natural resource equities are better at hedging inflation than commodities”.

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This chart shows how the Standard & Poor’s 500, natural resource equities and commodities (as defined by the Thomson Reuters/Jefferies CRB Index) performed across various inflationary regimes. Equities are the clear outperformers in times of low to moderate inflation. But as inflation begins to rise, natural resource equity returns catch up to and eventually overtake the broader stock market. Meanwhile, commodities tend to lag both categories of equities in almost every inflationary regime, only outperforming the S&P 500 in times of very high inflation.

This is because of the nature of commodities. They have an expected return of zero because any new investment return opportunities are eventually competed away and no competitive advantage exists. Equities have a positive expected return because company managements invest above their costs of capital to drive profits, which broadly translates as an equity risk premium.

The rolling three-year returns of the CRB index have oscillated wildly above and below the rate of inflation over the past 40 years. By contrast, natural resource equities have a built-in equity-risk premium that has allowed them to outperform commodities over a full risk cycle. “We cannot posit a direct correlation between commodity returns and inflation, as the chart shows they do not appear to closely track U.S. inflation levels”.

Commodities’ low correlation to equities means that holding them theoretically makes sense as a means to diversify a portfolio. But such diversification may come at a steep price if stocks continue rising. In next chart, the colored lines track the performance of the S&P 500 and the CRB Index during equity rallies, and commodity markets usually underperform in most instances we have tracked since 1965. Only twice in this time period have commodities kept pace with equities. The first time was from 1972 to 1978, which coincided with the supply shock of the global oil crisis. The second instance was the period from 1999 to 2002 when China’s boom spurred a surge in demand for commodities. Both events were outliers that dramatically reshaped the supply/demand dynamicfor commodities.

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“Diversification is a key objective of most investors’ portfolio- construction process, but we believe commodities are not the best way to achieve it. Consider the concept of the efficient frontier, which maps out the optimal investment opportunity set based on expected returns and risk levels. The CRB Index representing commodities is far from the efficient frontier, indicating that commodities do not provide sufficient expected return to compensate for the level of risk they pose. On the other hand, equities are above and to theright of commodities on the chart, which represents more risk, but also higher expected returns”.

“As the economy strengthens and interest rates rise, savvy investors will plan ahead for inflation and position their portfolios accordingly. We believe they should consider natural resource equities as part of their hedging strategies, given their compelling historical relative performance and attractive risk/reward proposition, particularly compared to that of commodities”.

Goldman Sachs Head of Latin America Named New Chief Strategy Officer

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Goldman Sachs nombra a su responsable de Latinoamérica nuevo estratega jefe del grupo — CC-BY-SA-2.0, Flickr. Goldman Sachs Head of Latin America Named New Chief Strategy Officer

Goldman Sachs named a new chief strategy officer on Monday, replacing an executive (Andrew A. Chisholm) who had worked at the firm for nearly 30 years and is retiring at the end of the year. Taking the reins at the new position is Stephen M. Scherr, who is the head of the firm’s financing group, according to firm memos reviewed by The Wall Street Journal.

Scherr, who will maintain his position as head of Latin America, a role he assumed in 2011, will work across the firm to develop and drive important growth initiatives as part of the firm’s global strategy. Such opportunities may include developing a more profitable private wealth-management business, or possibly using technology to develop and build new trading platforms.

“As a long-tenured leader in the Investment Banking Division (IBD), and as global head of the Financing Group since 2008, Stephen has a deep understanding of all of our businesses and of the needs of our clients,” Mr. Blankfein and Gary D. Cohn, the firm’s president, wrote in an internal memo. “As we advance the firm’s global strategy, Stephen will identify and help execute on opportunities to grow and build upon our strong client franchise across our core businesses.”

Stephen will help to coordinate the lending business as Goldman leverages its existing bank platform to provide credit to both corporate and individual clients, said Golman in the memos.

Stephen previously served as chief operating officer of the Telecom, Media and Technology Group, chief operating officer for IBD and head of the Americas Financing Group. He was named managing director in 2001 and partner in 2002. Stephen became a member of the Management Committee in 2012. He will continue to serve as a member of the Risk Committee, Firmwide Capital Committee and the Growth Markets Operating Committee.

Mr. Chisholm joined the firm in 1985 in New York as a mergers-and-acquisitions banker and also worked in London. He was made managing director in 1996 and partner in 1998. He became senior strategy officer in 2012 after running the financial-institutions group since 2003, a group he helped create, according to the memo.

Goldman also announced Monday that Jim Esposito and Marc Nachmann will succeed Mr. Scherr and become co-heads of the global financing group. Mr. Esposito was most recently head of the Europe, Middle East and Africa financing group. Mr. Nachmann was most recently co-head of the global natural-resources business, according to a memo sent out by the firm.

Succeeding Mr. Nachmann atop the global natural resources team are Gonzalo Garcia and Suhail Sikhtian as co-heads. Brett Olsher will also become co-chairman of the group, alongside John Vaske.

Wealth & Pension Services Group Announces Expansion into Florida

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Wealth & Pension Services Group, based in Atlanta, GA, has brought on its first group member in the state of Florida. James Larson II, Certified Fund Specialist, was formerly a Vice President of Investments with The Mutual Fund Store. Jim will now head up the newest office for Wealth & Pension Services Group in south Florida near the West Palm Beach area. “Jim has a great depth of experience, and we are excited to have him join our team,” William Kring, President of Wealth & Pension Services Group.

William Kring adds, “We have been looking at Florida for some time, seeking an advisor that matches our philosophy of providing excellent client service, trusted advice and a high level of expertise. With the addition of Jim, we can continue to build our services footprint in areas that naturally fit our client residences and lifestyle.”

Jim Larson adds, “I am really pleased to join a proven team of financial experts at a firm where the client’s needs are truly priority number one. The comprehensive wealth management approach that Wealth & Pension Services Group is recognized for will be a very welcome addition to the financial planning needs of the south Florida marketplace.”

Wealth & Pension Services Group is a leader in wealth management and 401k plans in the Atlanta area and southeast. Value-added offerings include their Guardrail Growth Investment strategies for individuals, institutions and 401k plans, Financial View 360 – a one source, up-to date financial hub to organize client investments, banking and other financial data, and FRAME – a Fiduciary Readiness and Management Enhancement process for 401k plans. The firm custodies assets at leading institutions including NFS, TradePMR and TD Ameritrade Institutional.

DeA&WM and LA-based Ivory IM Launch New UCITS Fund

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Foto: Cheezepie, Flickr, Creative Commons. Renta variable: catalizador de la rentabilidad

Deutsche Asset & Wealth Management and Ivory Investment Management, have announced the launch of the UCITS compliant DB Platinum Ivory Optimal Fund on Deutsche Bank’s UCITS platform. The fund, currently at $130 million, will be managed by Curtis Macnguyen, founder and Head Portfolio Manager of Ivory.

Ivory IM is a research-intensive, fundamental value-based investment firm founded by Curtis Macnguyen in 1998. Ivory’s investment strategy is to deliver superior, risk-adjusted returns with low correlation to market indices, while protecting capital in all market conditions. Ivory seeks to take long and short positions primarily in equity securities of publicly traded companies. Ivory emphasizes superior security selection over broad market exposure and combines bottom-up, value-based investments with a proprietary spread risk management system that significantly reduces volatility. Ivory manages over $2 billion in equity strategies and is based in Los Angeles. Prior to Ivory, Curtis Macnguyen was a partner at Siegler, Collery & Co.

Commenting on the launch, Tarun Nagpal, Head of DeAWM’s Alternative & Fund Solutions group for Europe and Asia, said: “This fund is an important addition to our range of UCITS products. We are pleased to have attracted such strong investor demand and oversubscription for this new product prior to launch. The fund provides a compelling opportunity to gain exposure to US equity markets, a key current investment theme for many of our clients.”

Curtis Macnguyen, Head Portfolio Manager of Ivory said: “We are excited to be working with Deutsche Asset & Wealth Management on the launch of the DB Platinum Ivory Optimal Fund. We are seeing significant interest from investors globally and this UCITS fund allows Ivory to offer our investment strategy to a larger and more diverse investor base.”

Bank Leumi USA Opens New Commercial and Private Banking Office in Los Angeles

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Bank Leumi estrena nueva oficina en Los Ángeles, en donde aglutina tres sucursales — Photo: Thomas Pintaric. Bank Leumi USA Opens New Commercial and Private Banking Office in Los Angeles

Bank Leumi USA announced the opening of its new branch office in downtown Los Angeles on June 2, 2014 at 555 West Fifth Street, 33^rd floor. Bringing the bank’s three LA area branches into a single location will provide more efficient, client-focused service to ensure that client needs are met.

For nearly 40 years, Bank Leumi USA has served the Los Angeles community with branches in Los Angeles, Beverly Hills and Encino. By moving to a single new location, the bank will strengthen its resources and teams to provide holistic banking and investing services to its commercial and private banking clients.

“We are proud to build on our decades of service to the Los Angeles community with our new office,” says Avner Mendelson, President and CEO of Bank Leumi USA. “Bringing our teams together in one location reinforces the services our clients rely on, and offers the support our customers – and prospective customers – need in their business and investments today.”

The new branch office will benefit clients through expanded commercial business services in key areas, such as Healthcare, Commercial Real Estate, Apparel, Technology and more. Similarly, private banking clients will benefit from innovative solutions and broker-dealer services through Leumi Investment Services Inc. (LISI).

Enrollment Period for BTG Pactual’s New Trainee Program is Officially Open

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BTG Pactual is looking for new talents for its trainee program. Candidates can be either Brazilians or foreigners, with a degree in Business Administration, Accounting, Economics, Math, Engineering and other sciences and technology, and must have graduated between June 2012 and December 2014. Candidates must also be fluent in English and Portuguese.

BTG Pactual is the leading investment bank in Latin America, with over 2,800 employees working at 19 offices in Latin America (Brazil, Chile, Peru, Colombia and Mexico), the US, the UK and China. In 2013, it was elected the Most Innovative Investment Bank in Latin America by The Banker and the Best Investment Bank in Brazil and Chile by World Finance.

In selecting candidates, those individuals more aligned with the bank’s culture stand out. BTG Pactual prioritizes identification with the values of the Bank over prior technical knowledge. Candidates who show initiative, focus on results, a long-term vision, an entrepreneurial spirit and determination are likely to receive a better evaluation. The apprenticeship experience at the Bank is based on day-to-day activities and candidates must be able to deal with managing multiple tasks.

The selection process includes online tests, as well as group dynamics and interviews with the HR area, managers and partners of the Bank. The job openings are for the São Paulo and Rio de Janeiro offices, which means those approved must be willing to live in either of these two cities. This edition of BTG Pactual’s Trainee Program features 40 job openings.

The program lasts for one year, starting in January 2015. During this period, trainees will undergo job rotation, meaning they will work in up to three different areas of the Bank. Job rotations occur every 4 months and individual performance will be assessed at the end of each period. Trainees will be closely monitored by the HR team and by the managers, and will receive a plan of technical and behavioral training throughout the Program. The technical training sessions are developed internally in partnership between HR and the business lines. Partners, associates and other senior managers of the respective areas are responsible for organizing these sessions. In addition to a salary, BTG Pactual offers trainees a health plan and restaurant/supermarket vouchers.

As an institution based on meritocracy, trainees may be retained on a full-time basis at the end of the program, in accordance with their performance during the period. This is the sixth edition of the trainee program and the retention rate of trainees usually surpasses 95%.

European High Yield is Not in Bubble Territory, but Investors Still Need to be Alert

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There is much talk at present about the European high yield market and whether the supposed bubble is about to burst.

Investors have enjoyed a stellar five year performance since the financial crisis. The BofA Merrill Lynch European High Yield Constrained index returned 165%, outperforming the stock market by over 40% (FTSE World Europe index). Spreads on the BofA Merrill Lynch European High Yield Constrained index have tightened more than 1700 basis points to approximately 350 bps over the German Bund. After such a buoyant period it is hardly surprising that concerns are emerging about the future trajectory of the asset class.

In a recently published report, Aberdeen AM discusses these issues explaining why they believe the European high yield is not in bubble territory, but investors still need to be alert.

Though yields are at all-time lows and the asset manager expects returns to be more muted it does not adhere to the argument that the asset class is a bubble for a number of reasons.

Tight valuations are not the same as a bubble

Aberdeen AM believes there are fundamental reasons why spreads trade where they do. Default rates are low and they expect them to stay low. The majority of issuance continues to be used to refinance debt, which has allowed companies to borrow at lower interest rates and extend maturity profiles. Failure to refinance debt when it comes due or an inability to fund interest expenses are the two most common triggers for default. Aberdeen AM estimates 25% of the market is pricing to call by the end of 2015, which will bring the cost of debt down meaningfully for these companies assuming no great exogenous shock occurs. Furthermore, companies are increasingly preparing for or are rumored to be preparing an IPO later this year. This is generally a positive as it is a de-leveraging event (“equity claw” clauses in the docs) and provides a tangible equity cushion.

Spreads nowhere near all-time lows

In 2007 spreads fell to 179 basis points at a time when the market was lower quality and a quarter of the size. Aberdeen AM thinks, based on historical trends with spreads where they are there is room for further tightening. Having said that they believe this is more likely to come from rising government bond yields than capital upside as high bond prices and call options limit that. However, assuming defaults remain low there should be some ability for spreads to cushion government yield increases. Spreads primarily compensate investors for default risk and loss given default. The good news is that since 2010 nearly half of new issuance in European high yield (as of year-end 2013) has been secured, which means recovery rates going forward will be higher than they have been historically. This needs to be factored in when looking at what spreads are discounting in terms of default rates. Aberdeen AM is of the opinion that today spreads represent no worse than fair value when analyzing them in this way.

Correlation to government bonds is low

If there is a bubble the asset manager believes it is in government bonds which have experienced a 30-year bull run and have been artificially supported by quantitative easing. However, even if this is a bubble, they think it is unlikely to burst anytime soon. Given the anemic state of the European economy the European Central Bank is unlikely to raise interest rates any time soon. Eurozone unemployment is not expected to fall much below 12% this year, inflationary pressure is currently non-existent and the most bullish Eurozone growth forecasts cap out at 1.5% for 2014. Even when rates do start to rise, the effect on high yield may be somewhat limited compared to say investment grade. The average maturity in European high yield market is around four years; so relatively short-dated. The four year bund yields 0.4% so almost all the yield is spread which is a key reason sensitivity to government bonds is so low.

Outlook

Whilst Aberdeen AM is not anticipating a significant sell-off in European high yield the asset manager is certainly cautious and would view a period of consolidation or even a modest correction as healthy. In what is often a seasonally weak period for financial markets, the second quarter could offer better opportunities to top up positions in favored holdings. At the same time, they believe investors need to be watchful as lower quality companies continue to take advantage of the borrowing environment and bondholder protection from covenants erodes. Longer term, the maturity wall and interest rate expectations suggest 2017 could be when defaults begin to tick up. Between now and then there is the opportunity to possibly harvest a healthy income yield.

1 The BofA Merrill Lynch Euro High Yield Constrained Index contains all securities in The BofA Merrill Lynch Euro High Yield Index but caps issuer exposure at 3%. The BofA Merrill Lynch Euro High Yield Index tracks the performance of EUR denominated below investment grade corporate debt publicly issued in the euro domestic or Eurobond markets.

2 The FTSE All-World Europe Index is a free float market capitalization weighted index. FTSE All-World Indices include constituents of the Large and Mid capitalization universe for Developed and Emerging Market (Advanced Emerging and Secondary Emerging) segments. Base Value 100 as at December 31, 1986.

3 Source: Bloomberg

4 Source: Bank of America Merrill Lynch Research.

5 Source: Bloomberg and Dealogic.