We continue to overweight the financial sector vs. the non-financial sector, which is currently benefiting from better fundamentals and relatively attractive valuations (though spreads, narrowing rapidly, are at low levels). The financial sector is also supported by improving capital reserves (and asset quality), better margins on the back of rising interest rates, and the regulatory landscape. Moreover, Q4 earnings confirmed the strength of bank balance sheets
Within the financial sector, CoCos remain our instrument of preference, benefiting, as they are, from earnings recovery, lower duration, and a weaker correlation to US Treasuries.
In the actual context of strong economic expansion momentum, equities are benefiting from more upside than credit.
Coupled with tight spread levels in both the IG and HY space, this environment is encouraging us to keep a positive view on convertible bonds, which remain an interesting source of diversification.
Idiosyncratic risk has risen in the US as the fiscal stimulus still favours equity over bond holders and has increased discrepancy amongst issuers. Moreover, while the Trump tariffs on steel and aluminium effects are balanced between producers and manufacturers and increased issuer dispersion, some sectors are facing secular growth challenges. All in all, selectivity will be key.
In this context of higher market volatility and issuance fears, we believe spreads should continue to widen. As valuations on US credit remain tight, we are maintaining an underweight stance on this asset class.
On the other hand, we prefer to focus on EM debt, as fundamentals, supported by a positive global growth and stable commodity prices, remain strong.