Has the European credit cycle been extended?

Key factors:

Regardless of lingering inflation and heightened price volatility, credit score markets remained sturdy within the first 4 months of 2024.
We imagine the European credit score cycle has been prolonged as a consequence of strong company and client steadiness sheets and adjustments in personal sector behaviour.
This implies buyers can proceed to profit from investment-grade credit score’s traditionally engaging yields.
However, we recognise potential dangers to the cycle. An energetic, nimble and liquid strategy, grounded in a radical understanding of the cycle, ought to, in our view, place buyers to handle danger higher and benefit from the present market and any dislocations as they come up.

Volatility in authorities bond markets, however calmness in credit score markets

To this point, 2024 has stored fastened earnings buyers busy, with a blockbuster new issuance calendar, a pivot from the Financial institution of Japan and heightened geopolitical tensions within the Center East all competing for the market’s consideration. But inflation stubbornly lingering above goal — has remained the dominant theme, leading to elevated authorities bond yield volatility because the market has walked again expectations for central financial institution price cuts all through the rest of the yr.

Credit score markets, nevertheless, paint a distinct image. European credit score markets have remained notably sturdy. Spreads have tightened, supported by strong company steadiness sheets, a resilient client and beneficial market technicals. But regardless of tightening, European investment-grade credit score continues to look interesting, offering traditionally excessive all-in yields of three.9%, permitting buyers to profit from engaging earnings with out the necessity to take extreme dangers. What do buyers have to find out about alternatives in European credit score and what may the remainder of the yr maintain?

Understanding the cycle

Understanding the credit score cycle — the recurring phases of enlargement and contraction within the availability of credit score — is a vital ingredient for efficiently managing European investment-grade credit score portfolios. Particularly, by anticipating adjustments within the cycle and dynamically managing total credit score publicity, we goal to take part within the upside whereas preserving capital on the draw back. Put merely, there are occasions we need to have extra publicity to credit score, and instances we need to have much less. By our energetic strategy to managing credit score danger, we search to insulate shoppers from the volatility of the credit score cycle and goal to offer them with a easy, constant return stream of outperformance.

We search to know the cycle by paying shut consideration to the energy of company steadiness sheets, the resilience of the buyer and the pace at which adjustments in rates of interest are transmitting by means of to the economic system. Regardless of one of the vital aggressive rate-hiking cycles in historical past, European Central Financial institution (ECB) coverage seems to be working, albeit with an extended lag than in earlier cycles. Mixed with rebounding development, we imagine that credit score ought to stay supported within the close to time period. On this article we determine three potential drivers of an extension to the credit score cycle.

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