Investment Institute
Fixed Income

What to know about opportunities in Euro Credit

KEY POINTS
Investor interest in euro credit remains strong as we approach the end of 2024.
The proactive stance from the European Central Bank has translated into increased economic dynamism, lower borrowing costs, and potentially positive total returns for investors.
Across the sector we favour financials and real estate sectors as well as high yield.

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.

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    Disclaimer

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

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