GLOBAL - With priced-in defaults being at a record high the time has come to invest in credit products, fixed income managers has suggested.
The credit crisis is not yet over and the effects on the real economy have still to be seen, but the risk premiums currently paid in some fixed income sectors make it worth going into this asset class - noted several managers speaking at the IPE Institutional Investment breakfast seminar in Munich yesterday.
"We will not see a worst case scenario because the state goes bankcrupt before individuals do," suggested Alex Veroude, head of credit at Insight Investment.
"You could almost say government bonds are riskier than AAA-rated asset-backed securities.
Uwe Fuiten, CEO of the investment management arm at WestLB Mellon Asset Management, also argued: "The more modern we are becoming, the shorter the impact of such crises gets".
He continued: "Scenarios like those seen in the Great Depression or in Japan are not very likely because institutions have actually learned from earlier crisis, for example the federal banks are not putting in place restrictive policies."
Fuiten added risk premiums in some fixed income segments were higher at the moment than ever before so with the right credit selection he sees huge opportunities.
"In the investment grade area, which has so far been seen as a safe area, we see spreads of 200 to 300 basis points, because in that area we find the troubled financials," he added.
Veroude confirmed Insight has seen more interest in investment grade products over the last few weeks and noted this could also be the reason why spreads have not fallen further, despite more bad news having surfaced over the last few days.
That said, he stressed it is not certain they will not fall again from now, arguing "it will depend on the politicians" and the impact their measures have on the market.
But he urged investors to "position themselves in the right areas already in 2008".
One of these areas for Veroude is AAA-rated ABS, especially mortgage-backed securities because someone's home is considered the best security.
He pointed out the major risk with these assets was people not paying back their mortgages in time and that mostly happened when they lose their jobs.
However, judging by current pricings of these ABS as much as 25% of people would have to become jobless for the risk premium to become uninteresting.
Veroude also claimed loans and long/short credit investments offered good opportunities at the moment - and more of them than he has seen in ten years.
But Emma du Haney, investment director for fixed income at Henderson Global Investors, warned good manager selection alone was not going to bring investors the results they needed.
She stressed the importance of venturing into new investment areas, like emerging markets, to avoid overcrowding in the classic bond sectors.
Du Haney added useful tools like credit default swaps will be "fully functioning again at some point soon" as an exchange is currently being set up to take care of counterpart risk.
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