The best type of restructuring for investors is austerity, a type of debt default that sees a government renege on its obligations to its own people rather than bond holders according to Christian Gattiker-Ericsson, the chief strategist and head of research at Julius Baer.
Given this option, which is already being imposed on citizens across Europe’s periphery, is one of only five that Gattiker-Ericsson believes are on the table, the chances of bond investors walking away without losses are small.
The other four options in Gattiker-Ericsson’s view are as follows: haircuts on outstanding bonds, an extension of debt, inflating away debt and currency debasement.
“Hence, realistically there is a one-in-five chance for fixed-income investors to make money,” said Gattiker-Ericsson who sees parallels with the trading environment in 2007/8.
“The hard part about investing is that you may be right about the trend, but performance can be vulnerable in the intermediate boom and bust cycles,” he added.
“The 75 percent price drop in oil in 2008 is still in most investors’ memories. This is currently making many investors uneasy as there are disturbing similarities to 2007–2008 at the moment,” according to Gattiker-Ericsson.
Those similarities are a big gain in oil pricesand higher rates from the European Central Bank leading to big volatility, this time around in assets like silver .
“Although we think that a replay of 2008 is unlikely in terms of magnitude, we certainly see risks increasing and hence price fluctuations should be countered by lowering risk exposure, at least until the dust of the recent shakeout has settled,” said Gattiker-Ericsson.
Buy the Dollar, Sell Commodities
Investors should be taking risk off the table, selling commodities ahead of further corrections and buying the dollar , according to Gattiker-Ericsson.
“Given the high beta characteristics of commodities in the current cycle, combined with the rather crowded positioning in the space and the risks of further regulatory interference a reduction in commoditiesshould allow to (investors) dampen overall portfolio volatility during the summer season,” he wrote in a note to clients.
While still positive on large, defensive stocks Gattiker-Ericsson is buying the dollar.
“The bearishness regarding the greenback is still extreme even when adjusting for the recent countermove. Hence, despite a long-term bearish case for the dollar, the recent rally could indeed have legs to go further,” he added.