What to know about opportunities in Euro Credit

Euro credit continues to attract investor interest thanks to strong company fundamentals, a dynamic market and supportive economic backdrop. Where there is interest, there are questions, so we wanted to share with you some of the queries posed by our clients about this asset class.

How do you view the role of central banks today?

Central banks play a crucial role, and we can see that the change in rhetoric is having a significant impact on the asset class. There is now less talk of fighting inflation and more talk of supporting economic growth, whether it be the European Central Bank (ECB) or the Federal Reserve (Fed). It is interesting, and unusual, to see that the ECB took the initiative this time by making 25 basis point cuts in June, September and October 2024. This proactive stance from the ECB has translated into increased economic dynamism, lower borrowing costs for companies and banks, and potentially positive total returns for investors.

You are talking about a soft landing for the economy. Why do you maintain this scenario?

We remain confident in the soft-landing scenario as we have positive growth in both Europe and the US despite unprecedented monetary tightening and believe that lower costs, supported by central bank policies, will support the economy.

Are you investing in financials?

We view the banking sector favourably. We believe bank earnings were outstandingly strong in 2023 and continued to perform well in 2024, as the rising rate environment boosted revenues. Non-performing loans are at low levels and the cost of risk remains contained. In our opinion, this is an ideal environment for banks, which reinforces our conviction in this sector, especially in subordinated financials.

What are your views on high yield?

We believe that high yield bonds have performed well in recent quarters despite initial fears of high default rates. Default rates have risen but, we feel, remain at manageable levels and do not indicate a widespread wave of defaults. We currently favour covered bonds, such as senior secured bonds and BB rated bonds.

How does your total return management on euro credit differ in the market?

Our unconstrained funds have done particularly well since inception, seeking to maximise returns regardless of the economic cycle. Our two main performance drivers are duration management and allocation between investment grade and high yield. We focus on the eurozone but have flexibility to invest in dollar or sterling markets if opportunities arise.

What are your views on duration?

We believe that the era of very high rates is behind us because inflation is under control and the economic slowdown is there. Central banks now have the opportunity to support the market by cutting rates if necessary. Maintaining positive duration in the event of market stress could act as a natural shock absorber.

Finally, what are your convictions for the coming months?

Our three main convictions are: The banking sector, which continues to generate good results; the high yield segment, which remains attractive despite higher but manageable default rates; and the real estate sector, which should benefit from lower financing costs. We remain positive on the asset class as a whole with a dynamic approach and a good understanding of market conditions.