Supportive macro drivers

Despite the recent volatility of credit spreads, we are still positive on the credit markets (financial and non-financial sectors). From a macro perspective, the EMU recovery is gaining momentum. If we consider the underperformance of the US credit market in Q4 and year-to-date, it has gained in attractiveness relative to the euro market (Chart 3). The risk-off sentiment fed by the worrying status quo relative to Greece’s funding issues has driven credit spreads higher over the last couple of weeks. The supply indigestion also contributed to the widening movement. We consider this correction a buying opportunity.

Supportive micro drivers, too

Corporate results are strong for the time being: about 25% of companies have announced their quarterly results in the euro zone and around 70% of them are beating the consensus. Non-financial companies are preserving their cash levels and keeping their financial leverage under control. Given the ECB’s massive sovereign asset purchases, we are seeking attractive spreads on a risk-adjusted basis: we continue to overweight BBB and peripheral names. From a sectorial perspective, we are keeping our overweight mainly on the Utilities, Telecom, Automobile and Industrial sectors. We also removed our negative bias on the Oil & Gas sector, now much more attractive given the rebound in oil prices.

Regarding financial companies, banks need to gradually raise their capital buffer to maintain their credit ratings. We are invested in subordinated debts mainly via the primary market to take advantage of the attractive features of the segment but have adopted a selective bias towards high-quality issuers.

Mixed signals from regulatory environment

Moody’s is going to introduce its “Loss Given Failure” component to address the new resolution regimes. We consider it will be positive overall for US senior unsecured debt ratings and EMU long-term deposit ratings. However it should be negative for UK and Swiss Holding companies with Senior ratings as government support will be removed.

Still on the regulatory front, we remain cautious on German senior debt as the German legislator is in favour of considering senior debt a “bail-inable” instrument. In the case of extreme events (default), the senior debt could be more impacted than before.