Obama's stimulus plan disappointing
Feb 25 2009 By Andrew Miller, The Journal
AS expected, the main focus of last week proved to be the announcement of the Obama administration’s economic policy measures.
Unfortunately – and as has become the rule rather than the exception of late – markets were once again disappointed by the response from Washington.
The fiscal stimulus plan was, in general, judged to be communicated too clumsily and lacking both size and short-term impact, with much of the benefit unlikely to be felt immediately. Similarly, the measures to help housing markets – and by implication the financial sector – were also deemed by markets to be insufficient and poorly communicated.
However, while the plans failed to provide a short-term lift to markets, they should at least help to put the US economy on a sounder footing in the quarters ahead.
On the macro news front, the main releases saw disappointments from the European purchasing manager indices (PMIs), where sentiment in the services sectors in France and Germany fell back sharply while confidence in the manufacturing sector failed to improve.
Further afield, Japan reported the worst economic growth numbers since the Second World War. Meanwhile, the US housing market showed further deterioration, as did the regional manufacturing PMIs for the New York and Philadelphia regions. All in all, recent macroeconomic data releases give little reason to believe that conditions are likely to get better any time soon and as such investors should continue to position for tough times ahead and maintain defensive positioning in their portfolios.
Within this, we continue to believe that investment-grade credit is a good, defensive way of gaining exposure to the corporate sector and is significantly less risky than equities.
There has also been good issuance in investment-grade bonds recently, which is in itself encouraging for the asset class. Meanwhile, spreads (the difference in yield between an investment-grade bond and a government bond of equivalent maturity) have continued to tighten.
Indeed, February has thus seen positive returns for both government and investment-grade corporate bonds in Europe (+0.86% for governments, +0.52% for corporates) and the UK (+2.62% and +1.43% respectively) although returns in the US have been slightly negative (-0.03% for US Treasuries, -0.33% for credit).
However, contrary to our expectations, but consistent with increased concern about the growth outlook and continued stress in the financial system, investment-grade credit has continued to lag government bond performance, despite the high yields on offer.
Recent developments have at least shown the value of maintaining substantial bond exposure in a balanced portfolio right now: while performance for 2009 to date has been far from stellar, investors in higher-grade bonds have at least avoided the bloodbath in equities.
However, recent price action has also shown that even relatively low-risk assets like investment-grade corporate bonds are still struggling to perform given the ongoing high levels of risk aversion.
In addition, even trading in the asset class is very difficult given continued liquidity problems. The surge in new issuance has done little to alleviate these problems, as the cash coming into the credit market has sucked up the new issues and not resulted in an increase in secondary market activity (normally investors will sell some existing holdings in order to generate cash to buy new issues, thus increasing liquidity).
Consequently, the easiest way to access the corporate bond market at present is through exchange-traded funds or managed funds – given that market illiquidity makes it very difficult to gain exposure to individual names, which in turn makes it almost impossible for individual investors to assemble a meaningfully-diversified portfolio.
Andrew Miller is regional office head of Barclays Wealth
