Positive on Credit markets overall

Despite the recent volatility of credit spreads, we are still positive on the credit markets (financial and non-financial sectors). From a macro perspective, the EMU recovery is gaining momentum. If we consider the underperformance of the US credit market in Q4 and year-to-date, it has gained in attractiveness relative to the euro market. The risk-off sentiment fed by the worrying status quo relative to Greece’s funding issues has driven credit spreads higher but moderately compared to the rate movements. We consider this correction a buying opportunity.

Corporate results are good so far

Corporate results have been good for the time being: more than a half of companies have announced their quarterly results in the euro zone and around 60% of them are beating the consensus. Non-financial companies are preserving their cash levels and keeping their financial leverage under control. From a sectorial perspective, we are keeping our overweight mainly on the Utilities, Basic Material and Industrial sectors. We also removed our negative bias on the Oil & Gas sector, now much more attractive given the rebound in oil prices.

Banks posted solid results above consensus. They continue to improve their capital ratios and leverage ratio in order to be compliant with regulatory requirements. We are invested in subordinated debts to take advantage of the attractive features of this segment.

We prefer peripheral and Hybrid debts

Given the ECB’s massive sovereign asset purchases, we are seeking attractive spreads on a risk-adjusted basis: we are going down the capital structure by investing in high-quality companies issuing hybrid debts with attractive return perspectives (see example of Crédit Agricole, Chart 4).

We also continue to overweight BBB and peripheral names. Within the peripheral universe, credit short and mid segments are also attractive compared to the same government segments (Chart 5).