Significant sales were attracted by European corporate bonds at the end of last year in the context of general risk prevention. Most often, risky assets have since recovered with a striking exception: European bonds were rated by BBB. This segment of the European credit market is, in our opinion, an attractive relative value at the moment, although we maintain a neutral view of the overall asset category.
Difference in European corporate bond spreads in 2014-2019
- Past performance is not a reliable indicator of current or future performance. It is not possible to invest directly in the index.
Source: BlackRock Investment Institute, with data from Bloomberg and J. Morgan, January 2019. Notes. The lines indicate the difference between the interest rates between the euro-denominated corporate bond spread and the different ratings. The difference between each rating level is calculated in relation to equivalent German government bonds. J. Morgan A, BBB and BB all-term euro credit indices represent corporate bonds.
BBB rating bonds are the lowest level in the Investment grade (ROI) category; therefore, they are usually more affected than their best partners in sales markets, but they also recover faster when they sell. Nominal value of the bonds BBB experienced a significant outflow at the end of 2018, resulting in higher yields. However, they failed to benefit so quickly from the recovery of other risky assets in 2019. The line at the bottom of the top chart shows this disconnect. The difference between the BBB rating corporate bond and the A rating (higher rating scale) remained around the high level observed at the end of the year, not tighter, as is usually the case in periods of instability. At the same time, the bonds were rated BB, the least risky high-yield or high-yield category, outperforming BBB-rated and higher-quality bonds, and the difference between their differences decreased (see the row below). at the top of the graph).
A favorable global context
The outflow of risk assets in December raised concerns about the slowdown in global growth. Concerns about the reduction of the European Central Bank's (ECB) asset purchases have increased the negative impact on European loans. This year, in our opinion, the ECB should buy only about 2% of European corporate bonds, compared with 15% last year. The late recovery of BBB-rated bonds appears to be partly due to an increase in BBB emissions from euro area financial corporations to strengthen their balance sheets rather than concerns about their ratings downgrades.
This high level of emissions 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.
The fear of recession in 2019 seems exaggerated (see our global investment outlook for 2019: global investment outlook for 2019). We see a slowdown in global growth, although it is enough for large central banks to wait, but not enough to end the current boom period. Growth in the euro area in 2019 is expected to stabilize at a low level thanks to the ECB's extremely favorable policy, further fiscal stimulus and the disappearance of one-off events such as regulatory disruption. in the automotive industry. The ECB approved its policy last week, as we expected. We share the view that growth risks have increased. This, in our opinion, makes the ECB's growth and inflation forecasts optimistic, and the rise in rates in 2019 is unlikely. The Federal Reserve (Fed) must remain detained until at least September. All this creates a positive global context for credits.
The medium-term threat to European unity, the still slow growth of the European economy and its dependence on trade make us cautious about European risk assets.
The medium-term threat to Europe, its slow economic growth and its dependence on trade make us cautious about European risk assets. We usually prefer US bonds to Europeans because the Fed has already strengthened its policy. However, we believe that BBB-rated European corporate bonds are an opportunity for both US dollar investors with currency risk limits and investors in euros. The main risk that might arise would be the re-emergence of a risk-aversion mood and associated outflows, caused by fear of recession and geopolitical judgments. We need to be more optimistic about the prospects for growth in the euro area or the opportunities to face political challenges, including Brexit, to be more positive about European credit as a whole.
In addition, European bonds are not sufficiently reduced for European bonds because we expect the rates to gradually increase in the medium term from the current unusually low levels.