Spanish investors are increasingly taking their money out of deposits and buying mutual funds as low cash rates make fixed income more competitive, says Paul Brain, of Newton Investment Management.
Brain, who heads fixed income at Newton, says interest rates on cash have dropped significantly in a clear sign that the move to very low, or negative, interest rates last year by the European Central Bank (ECB) is finally getting through to the Spanish market.
“Just a couple of years ago when we visited Spain we found we were competing against local deposit rates of 3-4% and a bond market that had a government 10-year yield of 4-5%. In that environment it was very difficult to sell global fixed income products,” he says.
“Now that cash rates have come down to nearer 1% and 10-year yields stand at just over 1% the fixed-income market offers a more competitive playing field.”
The move from cash to funds by investors could eventually help to rebalance the economy, Brain says, and notes that some analysts have predicted Spain to become the largest economy in the Eurozone, achieving annual growth of around 30%.
Brain recently visited Spain and says the Spanish economy is “gradually finding its feet” again.
Unemployment remains at over 20% but has stabilised and is starting to fall. The property and banking sectors are also stabilising and banks are able once again to support various sectors of the economy.
In relation to Spain’s general election this year and the rise of separatist movements, Brain says he detected no enthusiasm for, or expectation of, major political change across the Spanish regions amongst the professionals he spoke with.
“Beyond these wider regional concerns, Spain continues to galvanise itself in its long slow climb back to recovery.”
Last week global investors took money out of Spain bond funds for the ninth consecutive week, according to data from EPFR Global.
European bonds were selling off generally and a number of reasons have been given for it.
Tanguey le Saout, head of European fixed income at Pioneer Investments, says the most credible reasons may be that inflation has surprised on the upside and affected the inflation-protected bond market; valuations, as more people question owning bonds with negative yields; and positioning, as investors unwound from some of their favourite positions in a small sell-off, which then snowballed.
European economies have been growing recently. In the first quarter, Spain grew 0.9%. France grew by 0.6% and Italy lifted out of recession with growth of 0.3%.
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