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Each week, a professional investor tells MoneyWeek where she'd put her money now. This week: Rebecca Seabrook, co-manager of the F&C Strategic Bond and Extra Income Bond Funds.
Risk assets enjoyed a huge rally from the end of the first quarter of 2009. Corporate bonds in particular enjoyed big cash inflows and robust supply for the rest of the year.
But now I'm neutral on the asset class for two reasons. First, I am nervous about valuations, particularly given the scale of the recovery in prices between March and December 2009. Second, economic fundamentals may not be as supportive as they look. The credit crisis was caused by too much debt in the system. This hasn't been repaid but simply shifted from the financial sector to the government.
I also believe the widely anticipated V-shaped recovery is unlikely while substantial government debt remains. Low interest rates, quantitative easing and fiscal stimulus have offered some respite. But I expect Britain to bump along the bottom for a long while yet. The impressive returns of 2009 are unlikely to be repeated in the short-term.
In this context my first bond pick is Swiss Re (SCHREI 5.252% 2016/perp EUR: ISIN XS0253627136). The re-insurance giant incurred losses at the start of the credit crisis in 2007 and suffered during 2008. Things improved in 2009 after significant de-risking of its balance sheet. Swiss Re is a market leader in global reinsurance – rivals are unable to match it from both a volume and a geographical perspective. It has also strengthened its position in terms of capital and income and should be able to continue to service its bonds.
Secondly, I like Bank of America (BAC 8.125% 2018/perp USD: ISIN US060505DT81). The bank experienced some difficulties at the crux of the crisis through significant exposure to some of the most troubled assets. While its exposure to American consumer credit is still worrying, the firm nonetheless enjoys a strong geographical footprint across America. It has the leading branch network, a diversified book of business and an improved balance sheet. It's also completed a number of sizeable acquisitions in recent years (notably Countrywide and Merrill Lynch), which are likely to be a strategic 'perfect fit' and offer a big boost to profits.
Moreover, Bank of America has managed to raise capital quickly in distressed times – a testament to the markets' belief in the group's longer-term earnings profile. It enjoys a considerable deposit base, due to a large branch network. which gives it an advantage over competitors. It's also attractively valued compared to peers.
My last bond is Marks & Spencer (MKS 6.875% 2012/37 GBP: ISIN XS0335844402), another competitively valued firm compared to peers such as Next. The retail sector has done reasonably well recently, particularly over the Christmas period. Yet M&S has lagged due to the market's worries about margin pressure coming into the downturn. Still, this has turned out to be less of an issue than expected, following some strategic changes. These include increasing the efficiency of the supply chain by moving manufacturing away from China to cheaper regions.
M&S has also used its purchasing power with suppliers to lower the cost of goods bought. Meanwhile, the benefits of big cost cuts are beginning to filter through. Above all, new CEO Mark Bolland – who was very effective at Morrisons – is expected to perform similarly well at M&S. So I see M&S as a positive story, irrespective of the strength or otherwise of any recovery.
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Rebecca Seabrook
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