Barclays: Equities still in favor; financial, industrial bonds face different pressures, new focus on LBOs

By Andrea Heisinger

New York, March 21 - Bonds continued to lose favor to equities in the first part of 2013, and will that trend will remain in place for the near term, analysts from Barclays Capital said at a press briefing on Thursday.

Equities are outperforming almost all other assets by a wide margin, according to Barclays' analysis of the global outlook, which foresees those strong returns continuing.

"It's remarkably similar to three months ago," Larry Kantor, head of research, said of the bank's outlook. "If there's any difference, it's that things have panned out too well. We've come too far, too fast," Kantor added, referring to investor sentiment that has become more positive about riskier assets.

Jeff Meli, co-head of FICC research, said that there has been an increase in idiosyncratic risk in credit and that the correlation between financials and industrials has shifted so that "financials are under a totally different set of pressures."

Spreads on financials have tightened, so that the sector is not driving the markets as much, Meli said.

He also commented on a relatively new focus - and an idiosyncratic risk - to the credit markets from leveraged buyouts.

Meli name-checked the Dell Inc. and H.J. Heinz Co. sales, saying that "companies are reconsidering their capital structure policy, which is affecting spreads."

"Another one was Safeway," Meli said, referring to the grocery store chain that reconsidered its capital structure, causing an initial tightening of its bonds spreads, before they swung back and tightened to normal levels.

"Pure fundamentals are becoming much more important," he said. "A company like Genworth restructured its business, and it showed a massive rally in its spreads. It's less headline grabbing than LBOs, but still has its effects."

Elsewhere in the bond market, co-head of FICC research Ajay Rajadhyaksha said that bond rates will start to rise in the fourth quarter of 2013, and that Barclays doesn't like fixed income.

The Federal Reserve is expected to continue its third round of quantitative easing for the remainder of 2013, and will only scale it back in 2014, Rajadhyaksha said.

Kantor said that the recent turmoil in Italy during its elections, and the banking collapse in Cyprus were being viewed differently than if they had happened in 2012.

"It's impressive how the markets have shrugged it off, where a year ago it would have wreaked havoc," Kantor said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.