Uncertainties regarding the global economic outlook, oil & commodity prices drop, geopolitical risks in the Middle East and high volatility weighed on Credit markets and led to a risk-off environment. Credit spreads are now at almost 3-year high (Chart 5). Oil, Gas and Miner sectors were the biggest losers given their high correlations to the commodities. On top of that, the decision of Iran to increase its oil production drove commodities prices lower mid-January. Rating Agencies announced that these sectors were under review with likely downgrades.


Longer term, we still believe that in a low yield environment with accommodative monetary policy, a gradual recovery in Europe is generally a sweet spot for corporate bonds. But the current uncertainties prompt us to a more cautious stance. This cautiousness is reflected in our stance on non-financials. We took the decision to come back neutral on this segment overall. We maintain a positive stance on financials, a more defensive sector.

Technicals less supportive than in previous years

Supply & demand dynamics support our view: M&A predators (Chart 6) and US issuers tapping the euro credit market should create a positive net supply in 2016 for non-financials while the picture will be more mixed for financials: negative for Senior and positive for subordinated debt in line with regulatory developments.

Overall, the regulatory environment is favourable. The recent announcements point to a lower threshold and longer phase-in for systemic banks. Thus, there is less pressure to fulfil the debt shortfall. Within the financial sector, we have a preference for Subordinated debt (LT 2) compared to Senior debt. The carry-to-risk is more attractive for LT2 in an environment where banking issuers trade at lower levels than non-financial issuers.

Preference for non-cyclical sectors

In the non-financials space, we keep our underweight on Oil & Gas as well as Basic Resources sectors. The recent new drop of commodities prices has again put the sectors under pressure. We prefer sectors less sensitive to the cycle such as Telecommunications and Consumer sectors. These sectors include many important high beta issuers from the non-core EMU universe offering an attractive yield pick-up.

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