Pimco’s Ketish Pothalingam says increased M&A activity could end this year’s sterling bond issuance drought.
However, the manager of the £84m Allianz Pimco Sterling Total Return fund warns this in turn could lead to companies being downgraded.
“One of the strongest technicals in the sterling market this year has been the lack of issuance – there has been a 40% to 60% decline this year compared with 2009 which, admittedly, was exceptionally strong for new issues,” he says.
“The global nature of many of the companies listed in the UK means they have access to the European and US bond markets and are not compelled to issue in sterling.”
Pothalingam believes this will change in the wake of recent merger activity.
“The recent rise in M&A activity could be the catalyst for more issuance. However, the rise of M&A means you have to be careful about what you buy.
“You could hold a company whose credit metrics are changed as a result of an acquisition which in turn could see a deterioration in its credit rating,” he says.
Pothalingam says the lack of issuance has supported secondary market pricing.
Meanwhile, the manager retains an overweight to financials as sovereign debt crisis fears have receded.
“We have been selectively overweight financials all of this year. Some of the uncertainty around banks has now dissipated as the ECB and European governments acted together to reduce some of the concerns over sovereign debt in Europe,” he says.
“In addition, European bank stress tests went some of the way to reassuring the markets about European bank solvency and increasing transparency on European bank holdings of sovereign debt.
“We maintain the view that some Tier 1 and some Tier 2 bonds remain good value.”
