IG Credit performance returned in positive territory

The global agreement on Greece reached on July led to an outperformance of risky assets. However, from late July and beginning of August, Credit markets widened due to worry about a worse-than-expected Chinese slowdown and the substantial fall in commodity prices that plunge to their lowest level of 2015. Within European Credit, Financial Subordinated debt and non-financial Hybrids generated the highest excess return while Basic Resources and Oil & Gas were the biggest laggards.

We keep our overweight on EMU Credit

The issuance remained very sporadic over the summer in EU market as opposed to US Market. We expect a huge issuance calendar in September, after a 3-month freeze, offering attractive primary premium. In this environment, we will seize this opportunity to increase our credit exposure in the corporate bond portfolio. Moreover, the US Credit market displays a juicy yield of 3.4% with a differential between US and EU credit risk premium which has nearly topped (about 50 bps). As a result, we are planning to build a pocket of 10% in US denominated issues from American companies.

We are keeping our positive view on the Credit markets overall (non-financial and financial sectors) as fundamentals are in a good shape. On the one hand, corporate results for the 2nd quarter were good. On the other hand, financial companies continue to gradually reinforce their capital ratios. Lastly, monetary support is really strong and more and more Credit-oriented.

We continue to like hybrid to senior debt of high quality non-financial companies as the yield pick-up is attractive on a risk/return perspective. In the non-core space, we overweight Spanish names.

Bottom-up strategies

Bond picking is key in the current context since merger & acquisition cycle, the geographic exposure (share of business in Emerging countries) and sectorial drivers dominate credit headlines. We reduced some specific credit story in the non-financial sector. In the Oil & Gas sector, we are overall neutral but reduced Statoil (expensive name with poor current perspectives) and Anglo American Oil which displays a weakened credit profile. We also took profit on some insurance subordinated dated issuers after the 3rd bailout agreement for Greece was sealed (Generali, ING, CNP).