Overall, a positive environment for Credit markets

The global agreement on Greece reached in July led to an outperformance of risky assets. However, since late July and August, the Credit markets have widened due to worries about a worse-than-expected Chinese slowdown and the substantial fall in commodity prices, which plunged to their lowest level of 2015. Recently, the Volkswagen scandal has put additional pressure on the Automobile sector.

However, on a longer term perspective, the global picture is still appealing for Credit: a low yield environment combined with a sluggish growth in Europe is generally a sweet spot for corporate bonds. Fundamentally, executive management of non-financial companies adopt a cautious management targeting the uphold of credit metrics while financial companies continue to gradually reinforce their capital ratios. Besides, the monetary support is really strong and more and more Credit-oriented. And on a valuation perspective, the recent tumoil in market have led Credit spreads to 2013 levels (Chart 3).

A more defensive view on Credit

Thus, we are keeping our positive view on the Credit markets overall (non-financial and financial sectors). However, we preferred to reduce our positive positioning on the asset class, fearing a further correction due to macro uncertainties combined with the heavy supply forecast for the weeks to come.

One of the key issue was the abundance of issuance after the summer break. Finally, many euro companies have come to the market since early September. They came with an attractive premium, leading to oversubscribed deals and repricing of the secondary market. In terms of performance, the secondary issues have not performed well, in sympathy with those primary issues.

We favour most defensive sectors

We continue to underweight the oil & gas sector penalised by the fall of commodities prices while we have almost no issuers from the Basic Resources sector in our portfolios. We are also underweighting the Automobile sector, Volkswagen included. In the current environment, we prefer non-cyclical sectors such as Telecommuncations, Utilities and Infrastrucutre sectors.

M&A operations are gaining momentum, with Altice and AbInbev trying to absorb Cablevision and SABMiller respectively. We increased our weight on AbInbev, whose spread, following the bid for SABMiller, widened by about 30 bps. But the management has a strong M&A track-record and the acquisition, if done 50% by debt, will have an impact of 1 notch on the ratings, which, in our view, has been more than priced-in in the spreads.