Investors are continuing to stampede out of tax-exempt muni bond funds, but they probably shouldn't, according to Gary Pollack, Deutsche Bank AG's head of fixed-income trading.
The pall hanging over the municipal bond market actually presents a great opportunity, he said at a press briefing by the bank's Private Wealth Management unit last Wednesday.
Mr. Pollack said that investors should be looking for bargains in the muni bond market because predictions of a muni meltdown are vastly overstated.
Despite the serious fiscal problems facing many states and municipalities, the risk of defaults is low. If states and municipalities want to continue to access the bond market — and keep their cost of borrowing from skyrocketing — they most certainly will make their debt payments, Mr. Pollack said.
He also noted that debt service costs for larger issuers typically represent about 5% of their operating budgets — no small sum but certainly manageable for most issuers.
Smaller municipalities with declining tax bases represent significant risks, but the wave of widespread defaults recently predicted by Meredith Whitney, a well-known bank analyst, are highly unlikely, Mr. Pollack said.
The improving economy will help as well. With a stabilizing housing market and rising consumer expenditures, property and sales tax revenue should rise.
“We'll see a trough in the muni market in the next couple of months, and credit quality will begin improving by the middle of the year,” Mr. Pollack said.
His bank's investment team also believes that powerful positive feedback will boost the U.S. economy and stock market this year, said Larry Adam, U.S. chief investment strategist with the Private Wealth Management unit.
Thanks to a suddenly pro-business President Barack Obama, an accommodating Federal Reserve and increasingly confident consumers and businesses, Mr. Adam has a target of 1,400 on the S&P 500 by year-end and thinks that investors will continue to shift money into riskier assets.
Deutsche Bank Private Wealth Management manages $427 billion in global assets and $123 billion in the Americas.
Mr. Adam expects institutions to continue raising their equity allocations toward the historical norm of 55%, which would pump about $170 billion into the market this year.
He believes that retail investors will contribute $250 billion. Add in an anticipated $300 billion in stock buybacks from cash-rich companies, and the supply/demand picture for equities looks very strong over the next 12 months, Mr. Adam said.
E-mail Andrew Osterland at [email protected].
