Significant sales touched European corporate bonds at the end of last year, in the general context of risk aversion. Since then, the most risky assets are recovering, with a surprising exception: European bonds rank BBB. We believe that this segment of the European credit market has an attractive relative value, although we maintain a neutral view of the entire class of assets.
Differences in inflow spread for European corporate bonds, 2014-2019
- Past performance is not a reliable indicator of current or future performance. It is not possible to invest directly in an index.
Source: BlackRock Investment Institute, with data from Bloomberg and JP Morgan, January 2019. Notes: The line shows the differences, in percentage points, between the growth in the yields of corporate bonds denominated in euros with different ratings. The spread for each rating level is calculated against Germany's equivalent government bonds. PPP indexes Morgan A, BBB and BB All maturity Euro Credit indices are corporate bonds.
Bonds valued at BBB represent the lowest level in the Investment Unit category (IG); therefore, they are generally affected by their better sales colleagues in the markets, but they also recover faster when they sell. The bonds rated BBB experienced significant outflows at the end of 2018, leading to higher yields. However, they did not profit so quickly from the surge in other risky assets in 2019. The line at the bottom of the chart above illustrates this exclusion. The difference between the spread of BBB corporate bonds and rated A (ranked higher on the rating scale) was maintained around high levels observed at the end of the year, rather than tighten, as it usually does during periods of instability. At the same time, bonds rated BB, least risky in the high yield or high yield category, exceeded BBB-rated and higher-quality bonds, with the difference between narrowing the spread (see the line below). located at the top of the graph).
A favorable global context
Debt balances in December were fueled by concerns about a slowdown in global growth. Fears of a reduction in the European Central Bank (ECB) assets over the acquisition of funds have increased the negative impact on the European credit. This year, the ECB should, in our opinion, purchase only about 2% of European corporate bonds, compared to 15% last year. The subsequent recovery of BBB-rated bonds appears to be partly explained by the rise in BBB issues by eurozone financial companies in order to strengthen their balance sheets, rather than worrying about the deterioration of their ratings.
This high level of issuance may continue, but we believe that the European bond market as a whole, including the BBB class, should now benefit from more favorable conditions for recovery.
Fears of recession in 2019 seem exaggerated (see our global investment forecast for 2019: 2019 global investment outlook). We see a slowdown in global growth, albeit enough to keep the big central banks pending, but not enough to put an end to the current boom period. Eurozone growth is expected to stabilize at a low level in 2019, thanks to a highly tuned ECB policy, further fiscal stimulus, and the disappearance of one-off events, such as a regulatory disorder. automotive industry. The ECB has confirmed its policy last week, as we have assumed. We share his view that the risks to growth have increased. This, in our opinion, makes the optimistic forecasts for ECB growth and inflation, and the rate increase in 2019 is unbelievable. The Federal Reserve of the United States (the Federal Reserve) should remain on hold until at least September. All of this creates a positive global context for credit.
The medium-term threats to European unity, the still weak growth of the European economy and its dependence on trade, leads us to be cautious about European risk funds.
Mid-term threats to Europe, its still weak economic growth and its reliance on trade, make us cautious about European risk funds. We generally support the bonds of the United States over Europeans, as the Fed has already strengthened its policy. However, we believe that European corporate bonds with BBB are an opportunity for investors in US dollars with currency hedges and for euro investors. The main risk that could materialize would be the recurrence of a sense of insecurity and accompanying outflows that would cause fears of recession and geopolitical tensions. We need to be more optimistic about the eurozone growth prospects or the potential for resolving political issues – including Brexit – to be more positive for the European loan as a whole.
In addition, for European bonds, we are insufficient European sovereign bonds, as we expect the rates to gradually increase in the medium term of their current unusually low levels.