European investors eye substitutes for sovereign debt

The prospect of falling government bond yields has institutional investors considering their options, according to Allianz Global Investors' latest survey.
A bull figure is pictured in front of the German share price index DAX board at the German stock .../ Credits: Reuters
The fear that government bonds’ low interest rates and meager yields are here to stay crept into participants’ responses to the fourth RiskMonitor survey – Under Pressure, published today by Allianz Global Investors.

The survey was conducted in October 2012 by Allianz Global Investors and Investment and Pensions Europe. It gathered responses from 155 institutional investors with a total of 1,934.5 billion euros of assets under management or advice. The survey targeted institutional investors in Austria, France, Germany, Italy, the Netherlands, Switzerland, the United Kingdom, Denmark, Sweden, Finland and Norway). While the RiskMonitor is not representative, it carries enough weight to outline important trends among institutional investors in Europe.

Current interest rate levels are clearly the greatest worry to European institutional investors and, in their wake, the fear of financial repression trounces most other macro-economic issues such as the potential slowing of Chinese growth or the much publicized U.S. fiscal cliff. The specter of repression keeps a quarter of respondents awake at night, while America’s year-end dispute over spending cuts and tax hikes and China’s growth outlook worries only 10.5 percent and 5.9 percent respectively.

Concern over interest rates is particularly high in France, Italy and the German-speaking countries.

The alternatives are evident to most investors: Corporate bonds are considered a suitable substitute by more than two thirds of the survey’s respondents. Emerging markets debt (37 percent) and real estate (31.2 percent) come in second and third, followed by covered bonds (22.7 percent). Infrastructure debt (13.6 percent), infrastructure equity (13 percent), private equity (10.4 percent) and commodities (5.8 percent) are other alternatives named by respondents.
With particular regard to Asia, the survey states that three in five investors expect to raise their exposure to benefit from the region’s strong fundamentals. Yet emerging Asia is viewed with a healthy skepticism, particularly by Dutch and Nordic investors who often point to a lack of transparency. “Changes in the legal system are necessary to make this region more popular,” says one Dutch asset manager.

But not everything is bleak: Far fewer respondents consider sovereign debt a huge risk. Their number dropped from 35 percent (2011) to 13.2 percent (2012). The declaration of European Central Bank president Mario Draghi that the bank will stand behind Eurozone governments rang true with European institutional investors.

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