‘Fake havens’ could suffer correction: strategist

“Fake havens” have mushroomed in the continuous search for safe investments that offer some yield, after years of money-printing by the world’s major central banks.

But investors should be wary of them, says Alberto Gallo, a strategist with RBS. He lists five fake havens that could suffer a correction in the coming months.

Fake Haven Nr. 1: UK

The top honour belongs to the UK, despite its apparently robust recovery that has seen the economy expand by 3.1% in the first quarter. It’s all down to “substantial monetary and fiscal stimulus.” The Bank of England owns nearly 30% of the government debt, the highest percentage among money-printing central banks. But the budget deficit, at 5.8% of GDP, still remains higher than Portugal’s or Italy’s.

British households are spending more, but it’s on the back on increased borrowing while real wages stagnate. House prices have increased sharply in London and the south-east of England, sparking fears of a bubble. The European Banking Association’s bank stress test criteria assume a fall of 29.2% in house prices in the UK versus 21.2% on average in the rest of the EU. The Bank of England’s stress test is harsher: it assumes a 35% decline in house prices.

Fake Haven Nr. 2: Scandinavia

All Scandinavian countries have triple-A ratings, but they have high household debt: it’s close to 200% of disposable income in Sweden and Norway, and close to 300% in Denmark. Besides, the International Monetary Fund has said that the property market appears overvalued by as much as 40% in Norway and by around 22% in Sweden.

Sweden is in deflation – despite not being a member of the eurozone – and Denmark, also not a member, is close to deflation. The EBA’s stress tests for banks in these countries are more stringent than those for the rest of the EU, too – for Sweden they assume a 29% fall in house prices and for Denmark a 23% fall.

Fake haven Nr.3: Germany

Yields on bunds – German government bonds – are now below 1.5% and spreads on corporate and bank debts are “among the tightest globally” so bondholders have little or indeed nothing to gain.

German banks have been slow to add capital over the past few years. It is true, however, that they have moderately high capital ratios. In addition, some banks have “risky exposures” to trading and shipping or have had low profitability over the past decade.

Fake haven Nr. 4: Austria

It is still perceived as a safe haven, with its triple-A rating from two major credit rating agencies and 10-year yields below 1.7%, lower than Netherlands’ and France’s. But its banks have significant exposure to emerging markets in neighbouring Central and Eastern Europe (CEE).

Raiffeisen Bank, Erste Bank and Bank Austria (part of Italy’s UniCredit) have 40% of their lending allocated to customers in CEE. While these countries are slowly recovering, some of them could still see increases in bad loans. Raiffeisen and UniCredit, which have sizeable operations in Russia and Ukraine, are also vulnerable to the rising geopolitical tension between these two countries.

Fake haven Nr. 5: Australia

With robust growth of around 2.7% between 2010 and 2013 and a triple-A rating, Australia was a shining star among developed markets. But its growth has been driven by large investment in mining projects, designed to satisfy China’s appetite for commodities. The Chinese share of Australian merchandise exports has jumped to nearly 30% from 10% a decade ago.

But China’s economy has slowed down to around 7.4% and it is forecast to slow down further. Its shift to focusing more on domestic consumption instead of on commodities-heavy investment for export production has pushed down global commodities prices. Lower commodities prices and the end of the investment boom are putting pressure on public finances in Australia. The IMF has warned about the housing boom, with 64% of Australian banks’ loan book consisting of mortgages.