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'Risk Free' is Dead, Put Cash to Work: Strategist

Monday, 17 Jan 2011 | 7:23 AM ET

With the cash levels on the balance sheets of S&P 500 companies at their highest level for 60 years, companies should start buying, Bruno Verstraete, CEO of Nautilus Invest in Zurich, said Monday.

Negotiating Pay
CNBC.com
Negotiating Pay

“Given the low yields cash is still offering, we believe that investors will demand from companies to either put the cash to work, at much higher operational margins, or to return part of it to the investors. This will show as a pick up in dividend yields and mergers and acquisitions,” Verstraete said.

“This will show as a pick up in dividend yields and mergers and acquisitions. This trend has already started in the cash rich sectors, such as IT and pharma and will spill over to other sectors,” Verstraete said.

The comments echo those of banking analyst Meredith Whitney, who told CNBC last week that she would rather see US banks overpaying for assets than return cash to shareholders in the current environment.

One leading investment banker told CNBC he was very happy to see investors like Whitney advising firms to look at deals.

“If I tell you I believe 2011 will be a record year for M&A you will say I am talking my own book, if investors like Meredith Whitney start talking up M&A then people will listen," the banker said.

Risk-Free Investing is ‘Dead’

It might be boom time for the investment bankers, but it's a very different story in the bond markets where “traditional macroeconomic drivers will have very little influence on bond yields this year," Verstaete said.

“Short-term rates will not be increased given the weakness of western economies and low inflation,” he said. "Nevertheless, that will not be the case for bond yields, which given an increase in their risk premium will be pushed higher steepening the yield curve.”

"As long as the solution to the sovereign debt crisis is by issuing more debt, and structural debt repayment is not well defined, it will perpetuate peripheral European debt volatility as well as in the euro,” he added.

“This situation will only stabilize once Germany is willing to accept higher yields and an increase in the euro,” Verstraete said.

“Some of the AAA-rated government bond investments, formerly perceived risk-free, are currently seen in the market as holding higher risks than some lower-rated corporate bonds," he said.

“As the core of Europe will take more and more risk exposure to support the periphery, we believe the credit quality of strong European sovereigns will deteriorate.”

"We believe that sovereign defaults are a real risk and investors should not underestimate the financial impact of such an event on both the local economy and international banks," he said.

“These events have not been seen in the industrialized world for generations," Verstraete said. "The asset classes that are traditional safe havens will not function. Cash on the balance sheet of the bank will be at risk, governments will run out of cash if they want to intervene and save the system.”

“As such, owning a company at higher dividend yields contains less risk. Due to economic globalization, many factors, such as inflation, foreign exchange rates and even bond yields, are out of our direct control, but still have direct impact. This will create irrational moments. Risk free investing is dead.”

Contact Europe: Economy

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