European High Yield Update - October

DIVERGENCE PERSISTS IN HIGH YIELD CREDIT

STEPHEN MARSH, Fixed Income Portfolio Specialist

What were the key macro developments during October?

The macroeconomic developments over the last month have been one of divergence in my opinion, whereby we’ve got the European Central Bank (ECB) on one hand coming out with a more dovish statement, perhaps some more stimulus before the end of the year. And on the other hand you have the Fed with a more hawkish statement, perhaps the first Fed hike for a long time in December. And that divergence is playing out in markets and creating some interesting opportunities.

What impact have these macro developments had on markets?

We’ve seen that market volatility has subsided. We’ve also seen a strong rally in risky assets, specifically the high yield market, the European high yield market in fact, has outperformed and retraced all of its losses from September. It’s now in positive territory, which is very exciting. Also, that has been driven by the higher quality names such as the auto sector and fallen angels. We’ve also seen that the European high yield market has outperformed the US high yield market.

What changes have been made to the portfolio over the past month?

We still have the same themes running through the portfolio. Now, those themes are bottom-up security selection, overweight single B versus BB’s, overweight higher coupon, shorter-dated paper. This is more defensive and we feel it is more appropriate for our clients at this time in the market.

What is your current outlook for the asset class?

Looking forward, I think it’s a key theme of divergence, you know the ECB versus the Fed will play out, in my opinion, in the high yield market also. Over the last few years we’ve seen the European high yield market outperform the US high yield market. We think that will continue. Also, we think the portfolio is well positioned to exploit any bouts of volatility that might arise over the next couple of months.

2015-GL-2901