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Rising bond yields dent Europe’s “bond proxy” stocks

* Safe-haven stocks losing their appeal amid recovery

* Consumer staples index down 7 percent since June

* Bond yields make banks, real estate more appealing

By Abhinav Ramnarayan and Kit Rees

LONDON, Aug 2 (Reuters) – The prospect of higher interest rates and stronger global growth is tempting investors away from the richly-valued shares and relative safety of some of Europe’s largest consumer-focused players, leaving these vulnerable.

Fears that 2017 would be destabilising for the euro zone given the slew of elections, Brexit negotiations and U.S. President Donald Trump’s trade policies, saw investors pile into stocks such as Nestle, Diageo and AstraZeneca at the end of last year.

Such stocks came to be known as “bond proxies”, providing stable earnings and a safe place to put your money in the same way government bonds did before their yields were eroded by extraordinary monetary stimulus.

However, this proxy status looks set to become increasingly redundant as political concerns ease, bond yields rise and the outlook for the European and global economy brightens.

“In the last few years, the search for yield was such a prevalent theme that investors would look for anything like yield in every asset class,” said PineBridge Investments multi-asset chief Hani Redha.

“That is going to reverse gradually as rates rise – bond proxy stocks are vulnerable to this back up in yields,” he said.

After hitting a record high in early June, Europe’s consumer staples stocks, which include food and beverage firms and big tobacco producers, have significantly underperformed broader indices.

An MSCI sector index is down more than 7 percent since, compared with a 2 percent dip for the broader MSCI Europe.

Moreover, valuations are close to multi-year highs, raising the risk that one-off disappointments trigger sharp sell-offs.

Last week’s surprise announcement from the U.S. Federal Drug Administration that it would seek to cut nicotine levels in cigarettes wiped billions off the value of major tobacco producers.

UBS Wealth Management and NN Investment Partners are among those to have switched to other sectors which they believe will benefit more from the recovery, including financial, industrial and technology stocks.

“That reduces the need to stay in the safety sectors, and it allows you to play financials and energy, more recovering sectors,” said Caroline Simmons, deputy head UK investment office at UBS Wealth Management.

Mark Robertson, head of NN Investment Partners’ multi-asset portfolio, said he is positioned in equities that will benefit from higher yields such as financials and technology.

Banks and brokers have also flagged concerns around consumer staples stocks.

Analysts at Goldman Sachs warned of fragmentation, slow demand in the U.S. and input cost pressures. For Credit Suisse’s investment committee, consumer staples is now one of their least favoured sectors, and has warned that merger activity, which has helped to underpin valuations, might not continue.

Marcus Morris-Eyton, European equities portfolio manager at AllianzGI, is still investing in the sector, though he warned it is not cheap.

He said he had increased his position in Reckitt Benckiser , citing its takeover of U.S. baby formula maker Mead Johnson, and trimmed Diageo on valuation grounds.

“We need to be conscious of valuations and it’s a sector which probably would come under pressure if you saw meaningfully rising rates from here,” he said.

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