European High Yield Update - September 2015

MARKET SURPRISES, DOWNGRADES AND WIDENING SPREADS

So, September was the month where volatility finally impacted the market and this rise in volatility was triggered by three major events: first, the Fed’s decisions for rates to remain on hold, then the negative headlines surrounding Volkswagen and lastly some negative news on some high profile issuers.

Credit spreads widened overall as a result and high yield was no exception. In fact, the performance of European high yield in September was -2.60%, which is the worst month since November 2011 at the height of the sovereign crisis.

If we go back to the month of September, what really took the market by surprise was the Fed’s decision to lower its long term growth forecast, raising question marks about the state of the global economy.

Then we had some issuers like Sprint being downgraded in the US and closer to home we had Volkswagen of course with its diesel engines. And what started as a very isolated event became more of a widespread risk with the whole of the automobile sector suffering, in investment grade but also in high yield.

So issuers like Peugeot or Renault or Fiat lost as much as six points on their 5 year generic bonds.

And then of course we had the energy sector, where energy issuers continued to suffer in the absence of any meaningful rebound in oil and commodity prices.

In terms of outlook, we still remain defensive as we think that investors’ outflows could still weigh negatively on the market short term.

We tend to keep a higher allocation to cash, around 4%, to make sure that we can buy new issues or indeed that we can participate to existing issues at lower prices.

As it was last month, we keep being invested in higher income, lower maturity bonds, which gives us protection and also where the price volatility is less affected by the current state of the market.

So, in summary, a bit on the defensive side, but still on the lookout for opportunities to invest.

2015-GL-2670