Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and here with me today to give his three bond picks is Nick Hayes, Manager of the AXA Global Strategic Bond fund.
Hello, Nick.
Nick Hayes: Good morning.
Wall: So what's your first bond pick?
Hayes: I like peripheral corporates. I think we've seen over the last couples of years that you are seeing a big differentiation between Northern and Southern Europe. But certainly we like corporates that are Southern European have been beaten over the last couples of years and they are still seeing a wider spread than the sort of Northern European spreads. So, certainly investment grade, but also high yield names that are coming from Southern or Southern European areas, I think they offer attractive yields.
Wall: So, investors will hear high yield which we know are a bit more risky and peripheral Europe which we associate with risk, is this just a very risky play then or…?
Hayes: It's certainly more risky than Northern European, but the point is that everyone thinks it's so risky. A lot of Southern European names actually are quite diversified. They have global businesses. They might have exposure to North and South America or Asia. But just because they are tarnished with that Southern European name, that's why people have been quite scared over the last couple of years. So, that's why it is, we think a pretty reasonable spread, and we think that that offers opportunities.
Wall: So, choosing quality then?
Hayes: Absolutely, yes. There is a variation. Bank debt for example, we tend to like peripheral names. We prefer sort of the senior debt rather than the very, very subordinated names, certainly, so choosing the right type of quality.
Wall: Financials there. And I know your second pick is insurers.
Hayes: Yes. We like insurance papers. Again it's a sector that's much aligned. It gets thrown in with this sort of the bank debt. I think if we look at average indices, it says sort of 10% rather than bank debt might be of 30% of 40%. So, we think it's much less covered than it should be. So, we have a – what I think is a pretty good analyst who coverers insurers. We look into the individual names and there we like to take quite subordinated issuance from insurers, because we think there, the risk reward is pretty attractive.
Wall: Are we talking about U.K. or U.S. here?
Hayes: No, European, U.K. and some U.S. names, but again, we could even delve into some of the sort of more peripheral names in insurers where we think that the risk reward is pretty attractive. We certainly like some of the sort of more global names.
Wall: And what's your third bond pick?
Hayes: Third bond pick, I think is inflation linked. It's been much (blind) again. Last year was a pretty bad year for inflation expectations. People despite the recovery, people are starting to have pretty low expectation for inflation. Ultimately, we think that with all the QE that we've had, there will be quite big inflation probably problems, if not big inflation pickups over the coming years.
So, we think inflation protection is quite cheap. The key to inflation protection first of all is the duration. You know what kind of exposure to underlying maturity you're having, but also what's the breakeven. We might prefer breakeven to duration. So, we like short-dated inflation protection.
Wall: Regarding inflation, obviously emerging markets have seen some of the last – the last year, but inflation in developed markets has been quite suppressed. Are you saying then you think this is not going to last?
Hayes: I don't think it will last. I think if you look at the U.S. for example, the U.S. economy is further ahead than we are in the U.K. and particularly Europe. So, I think once we start to see that employment level come down, once we start to see some sort of wage inflation, then I think there definitely, you'll start to see a pick-up in inflation. The expectation is whether it will come sooner. Those expectations will be pushed out, but we think certainly we'll start to see inflation, but certainly in the U.S. more so than the U.K and Europe. Europe is still slightly struggling economically, so therefore that's where there is probably more expectation of deflation than inflation. But we'd like inflation protection in the U.S. in particular.
Wall: Nick. Thank you very much.
Hayes: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
