Pioneer likes Italian, Spanish government bonds

LONDON Mon Dec 6, 2010 3:15pm EST

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LONDON (Reuters) - Italian and Spanish government bonds are a buy thanks to their liquidity and the progress on fiscal consolidation, while U.S. or European firms exposed to emerging market growth are also attractive, Pioneer Investments said on Monday. Giordano Lombardo, Pioneer's Group Chief Investment Officer, also told the Reuters 2011 Investment Outlook Summit that the European Central Bank's bond buying program would help drive the euro down to at least $1.25 in the short term.

European government bonds stabilized in the past week as ECB buying of peripheral debt helped ease concerns that the euro zone crisis would spread from Greece and Ireland to bigger economies such as Spain and Italy.

"The peripheral bonds offer value. They are a buy," Lombardo said at the summit, held at the Reuters office in London.

"Italy probably has the best fundamentals in terms of deficit reduction... We are quite constructive on Spain. Our big trade is to be long Italy against the German bund."

He added Italy's deficit was due to interest payment and the country was close to a primary surplus.

Yields on German government bonds were unattractive given strong German growth.

"We believe the level of interest rate in Bunds offer little value apart from their safe-haven appeal... The German economy is very strong and showing that the German economic model is working," he said.

The ECB's bond buying and liquidity operations are needed to sustain European markets but the single currency is likely to suffer as a result, Lombardo said.

"Much looser type of signals in terms of liquidity and buying bonds is going to be the reason why the euro is going to be weak. The weakness of the euro needs to be washed out," he said. "The euro can go at least to $1.25 and overshoot."

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On equities, Lombardo said attractive valuation and strong corporate profits would drive the market higher.

Companies with ample cash -- which he estimated to amount to 10 percent of global equity market capitalization -- are likely to leverage through mergers and acquisitions, dividends and capital expenditure.

"We believe the bull market is not at its early stage but quite mature. Given the support of valuation that corporates have, the fact that companies have full of cash and desire to leverage their balance sheets and the competition with other asset classes, equities are by far the best asset class of 2011," he said.

Pioneer likes gaining exposure to emerging economies indirectly via investing in technology, materials and energy sectors within the developed world. It also likes EM-exposed banks such as HSBC (HSBA.L).

Emerging bond markets have seen significant flows but local currency bonds, such as those in Korea, were attractive, Lombardo said. Investment grade credit was the best asset class in 2010 but returns going forward are unlikely to be as rosy.

"In terms of credit next year we're not going to see the support of declining interest rates as we saw in 2010. We still have a positive carry. There is a further scope for spread tightening between 30-50 basis points. Easy money is behind us," he said.

(Editing by Andrew Callus)

(Additional reporting by Jeremy Gaunt)

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