The ECB will need to enact QE sooner rather than later to regain credibility and push the eurozone back onto a strong recovery footing, Citywire AAA-rated Jack McIntyre has said.
McIntyre, who co-runs three global bond funds at Legg Mason Brandywine, said he expects action in early 2015, with the currency being a main target of policy.
‘The ECB made some mistakes, [former ECB President] Trichet tightened in 2008 and in 2011, Draghi let that bounce, now there is an attempt to return where we were in early 2012 and I think they are struggling to get there’, McIntyre said.
‘Protectionism is taking hold of currencies and whatever Draghi’s stated goal QE is, it should be towards weakening the euro.’
McIntyre pointed to the weakening of the yen by the Bank of Japan as an example of effective policy and suggested the ECB should follow suit. He said: ‘Japanese corporates are now winning the competiveness battle over German corporates.’
Policy dependency to continue
The plans for the future, McIntyre said, would have to depend on further monetary policy despite the central bank stating it did not want to depend on this route.
‘Europe doesn't have a lot of leverage to pull the eurozone and Draghi has talked about this relying too much on monetary policy,’ he said.
‘You have to get banks lending because we are in an environment where you just don't have a lot of other levers to pull so we really have to rely on monetary policy.'
‘The ECB has taken up the balance sheet by a trillion, so at a minimum Draghi has to go forward with QE, if he doesn't, then there is a credibility issue which is never a good thing when it comes to central banks,’ McIntyre said.
The combination of these factors, McIntyre said, would be the reason for stimulus in Europe arriving sooner rather than later. ‘I would bet it will be in early 2015, whether it’s going to be effective or not that's another question’, he said.
‘I think the ECB wants to see the take out for the targeted LTROs, if that's disappointing it will bring things forward to a sovereign version of QE,’ he added.
Eyes on capital flows
Looking at macro matters, McIntyre said global capital flows to Japan are one of the big themes influencing bond markets.
‘Real GDP growth in the third quarter was 3.9% in the US, yet 30-year yields are fading 2.95%, one of those [numbers] is wrong because it’s very rare you get nominal treasury yields trading below real GDP growth’, McIntyre said.
Meanwhile, McIntyre sees the best opportunities in the developing world, where some of the capital currently invested in US treasuries may end up.
‘[This could] make its way into Brazil, South Africa, Mexico, Indonesia and India because many of these still attractively price bond markets and currencies,’ he said.
For this reason McIntrye and his team find better value in non-index countries.
‘Global bond market indexes are constructed in such a way they are skewed toward the Eurozone, Japan and the US, that typically adds a level of risk to the portfolio management process, historically we have found better value in countries that are a very small part of the index’.
The Legg Mason Brandywine Global Fixed Income fund returned 8.47% in US dollars over the three years to the end of November 2014. This is while its Citywire benchmark, the Citi WGBI TR USD, fell 1.4% over the same period.