European High Yield - February 2016
Let’s not forget about the fundamentals!
It’s been a turbulent start to 2016. European high yield, like most other risk markets, has been hit hard by fears over China’s slowdown, the declining oil price and banking sector concerns. The asset class’s strong fundamentals have very much taken a backseat to the global headwinds, but has anything changed fundamentally in European high yield? The answer is no, and it is important to remember this when bouts of volatility cause large price swings and weakness.
Technicals, while challenged in January with mutual fund outflows of over €1 billion, remain intact overall. Issuance in the primary bond market totalled just €0.9 billion in the first month of 2016 – that’s down sharply from the €4.6 billion issued in the same month last year1. On top of this, we expect higher coupon payments and a large number of bonds to be called this quarter. This means that the supportive technical environment that we saw during 2015 is likely to continue (last year, new bond issuance was the second largest ever on an annual basis, but significant bond redemptions and coupon payments resulted in low net issuance).
Fundamentals underpinning European high yield remain sound. The European Central Bank (ECB) is ultra-accommodative, and its recent dovish rhetoric raises the probability that further monetary easing measures could be announced as early as March. This is likely to keep yields on eurozone government bonds low, which could push investors further down the credit curve, potentially into high yield. In addition to the ECB’s dovish stance, further support comes from the fact that Europe is in a more credit-friendly part of the economic cycle, which could feed through into better earnings going forward.
European high yield benefits from a number of supporting features and it is important to keep these in mind during turbulent periods. Pricing anomalies and dislocations often occur during bouts of volatility, which can create good buying opportunities that we will look to benefit from. Our focus remains on conducting bottom-up credit research to uncover the best opportunities for our clients while protecting the downside.
1 Source: JP Morgan
2016-GL-3440
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