Sweet spot for Credit markets

Concerns about a general global slowdown and specific risks like the Volkswagen’s gas emission scandal and Glencore’s debt burden had a spillover effect on Credit markets. Spreads have therefore widened reaching a 3-year high in late September.

In this context, corporate bonds have gained in attractiveness from a valuation perspective. Moreover, a low yield environment combined with a slow recovery in Europe is generally a sweet spot for corporate bonds. Finally, the postponement of the first rate hike by the Fed brought some fresh air for Credit. All in all, we remain therefore convinced that in a longer term perspective, the global picture remains appealing for Credit. (Chart 3).

Positive regulatory environment for financials

Fundamentally, financial companies continue to gradually reinforce their capital ratios. Besides, the regulatory developments have been favourable for financials with relaxed TLAC (Total Loss Absorbing Capital) requirements. After the correction in spreads, we see value in financial companies. We continue to favour Subordinated issues (Lower Tier 2 and AT1) versus Senior ones (Senior Unsecured Banks) and have a positive bias on real estate issues in particular.

Selective bias on non-financials

Overall, we have also a positive bias on non-financial companies. Despite a mixed start of the earning corporate results, we believe that earning revisions by analysts have been exaggerated. Also, executive management of non-financial companies adopt a cautious management targeting the stabilisation of credit metrics. Further, the monetary support is really strong and could be more Credit-oriented in the weeks to come.

On the one hand, we favour non-cyclical sectors such as Utilities, Telecommunications and Infrastructure sectors. These sectors include many important high beta issuers from the non-core EMU universe offering an attractive yield pick-up. Also, some of them should be target from ECB purchases.

On the other hand, we continue to underweight the Basic Resources sector in our portfolios.