Positive fundamental drivers for the credit markets

We are still positive on the credit markets (financial and non-financial sectors). From a macro perspective, the EMU recovery is gaining momentum. The corporate results season has started well, with Non-financial companies preserving their cash levels and keeping their financial leverage under control. Generally, companies have beaten the consensus. If we consider the recent underperformance of the US Credit market (Chart 4), it has gained in attractiveness relative to the euro one. From a sectorial perspective, we are keeping our overweight mainly on the Utilities, Telecom, Automobile and Industrial sectors but underweighting the Oil & Gas sector, which is suffering from the decline in the oil price.

Mixed technical signals

Overall, the net supply (issuance minus redemptions) should be positive in 2015 for the first time in six years! We observed recently many Additional Tier 1 and Hybrid primary issues in this risk-seeking environment. Banks need to gradually raise their capital buffer to maintain their credit ratings. We are invested in hybrid debt via the primary market to take advantage of the attractive features of the segment but have adopted a selective bias towards high-quality issuers. The scarcity of high-quality names triggered by the current and upcoming ECB purchase programmes is creating supply & demand imbalances and a search for attractive yield pick-ups. Consequently, we prefer BBB issuers, which still offer some potential spread-tightening.

Bottom-up opportunities in the insurance sector

We are still positioned to benefit from the likely catch-up of subordinated insurance debt versus subordinated bank debt. In addition, within the insurance sector, we prefer non-life companies to life companies. Given the structural mismatch of lower asset duration relative to liability duration, the interest-rate risk for life insurance companies is becoming more and more challenging. Conversely, in a low-yield environment, the short liability duration of non-life companies is less exposed to these kinds of risk. Among non-life companies, however, we prefer non-life traditional businesses such as British insurers (which does not offer any guarantees on its unit-linked life accounts) and CNP.