Asset manager with USD40 billion can ignore ‘financial Armageddon’

The Euro sculpture stands in front of the European Central Bank, right, in Frankfurt, Germany, on Friday, Dec.16, 2011.(AP Photo/Michael Probst)

The man in charge of bond investment at Norway’s biggest bank says monetary stimulus will save the world, for now.
Next month, the European Central Bank may step in to rescue the region’s “dysfunctional banking system,” according to Svein Aage Aanes, the head of fixed income at DNB Asset Management.
“Many are a bit skeptical but I still think the central banks have some dry gun powder left,” Aanes, 49, who oversees 315 billion kroner (USD40 billion), said in an interview in Oslo last week. “The ECB can do much. This will calm down.”
DNB’s asset management unit has an investment horizon of 6 to 12 months. It wants to buy more corporate bonds, and is working on the timing of that move. It’s especially interested in bank debt, where yields have surged this year amid concern the world is about to experience another financial crisis.
The bank sector needs to be rescued, with yields now so high that lenders can’t issue subordinated debt, according to Aanes. Investors are counting on the ECB to “calm down” markets with rate cuts, more QE or again step in with specific measures for the banking system, he said.
But the risk is that the “development becomes self fulfilling,” Aanes said. “When the stock market falls significantly, credit spreads widen, funding costs for banks increase, costs for companies rise – that’s negative for growth.”
Part of what’s rattling global markets is a slowdown in China. But investors are underestimating the power of the Chinese government to steer the world’s second-largest economy through the turmoil, Aanes says.
“Against what normally would’ve been a clear bubble situation there’s a government in China that has completely different tools and the ability to intervene through regulations and capital controls,” he said. “It’s a terror balance between an unbalanced economy and a government with a big foreign exchange reserve and economic muscle.”
Given DNB’s investment horizon, it’s pointless for the fund to think about a financial meltdown years into the future.
“If we think credit spreads will narrow because someone will clean up in this round, that’s a good investment,” Aanes said.
But even with a short-term view, there are scenarios that can’t be ignored. Central banks will at some point need to “break this loop” because markets are relying on “monetary experiments on a scale that has never been tested before,” Aanes said.
“What is the end game? I don’t have the answer. No one has,” he said. “The risk is obviously, if this doesn’t hold, a financial Armageddon.” Jonas Cho Walsgard, Bloomberg