Supportive macro and micro drivers

Positive on the non-financial sector

The companies have generally beaten the consensus during their last corporate results. Specifically, non-financial companies are preserving their cash levels and keeping their financial leverage under control. Their Credit metrics are close to those observed in 2006 in core countries but spreads are currently wider. Given the massive asset purchases of the ECB, we are searching attractive spreads on a risk-adjusted basis: we keep overweighting BBB (Chart 4) and peripheral names. Sectorially, 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 and geopolitical turmoil (Petrobras, Gazprom).

We are also going down the capital structure by investing in highquality companies issuing hybrid debts with attractive return perspectives via the primary market.

A more cautious stance on some financial Senior

We continue to overweight the financial sector with a preference for subordinated debts as financial companies continue to gradually reinforce their capital ratios. On the bottom-up side; we are still positioned to benefit from the on-going catch-up of subordinated insurance debt versus subordinated bank debt. We also prefer senior operating debt compared to senior holding debt. The former is more and more scarce while the latter could be impacted by downgrade revisions of Rating Agencies.

The German legislator has suggested to make senior debt a bailinable instrument. As a result, in case of extreme events (default), the senior debt could be more impacted than stated before. Therefore, we preferred to take profit on German senior debt. In a near future, it could be a further source of concern as this proposition could spread to other EMU countries.