TRANSCRIPT:
John Taylor: In 2024, we had a lot of election risk driving market volatility, and as we enter 2025, we still have a lot of political uncertainty in the form of French and German politics, as well as uncertainty from outside of Europe in the form of tariffs.
But that does create some certainty in the form of the ECB continuing to cut interest rates from 4 to 3 to 2[%], and maybe even below, in an environment of fairly weak growth and low inflation.
That’s a really good environment for bonds in the 0- to 10-year maturity bucket, which are going to be pulled lower as the central bank cuts interest rates, while the longer-dated bonds might be more negatively impacted by the fiscal deterioration we’ve seen across governments globally, so maybe some steepening of the curve there.
With that macro backdrop, Souheir, what are the implications for the European corporate investment-grade market?
Souheir Asba: The macro backdrop that you've described is pretty positive for credit. We think that as money goes out of the money-market funds from cash and into investment grade, that will continue the positive flow backdrop that we've seen throughout the year. We think that that will continue as the ECB continues to cut and the curves continue to re-steepen.
JT: So the yield argument is pretty compelling. Are you concerned at all about credit spreads being pretty tight?
SA: Well, if you look at where Euro investment grade is trading, it’s still pretty attractive on a relative value basis. And then if you dig deeper into the breakevens—i.e., how much of a spread move wider do you need to lose money on the year—it's around 23 basis points, which is equivalent to over a 20% move overall. That’s a pretty large move.
We need to put that in context of a fundamental perspective. We’re going into the year with stronger fundamentals, cleaner balance sheets, and really the appetite for any corporate to go into aggressive capital deployment—M&A, share buyback—is relatively limited due to that macro uncertainty. So, from a credit perspective, that’s a positive backdrop for us.
JT: Thank you. Jamie, does that positivity carry over to the European high-yield market?
Jamie Harding: To a degree. As a starting point, we’re cautious, given the risks, post the US election, potentially to the downside on growth. But the prospect of a 5% to 6% total return next year in European high yield is fairly high. The starting yield matters, and it’s very attractive now at 5.75%, versus more recent times.
JT: And what would need to happen to see a negative return in high yield?
JH: You’d have to see yields move around 225 basis points higher, which is very extreme. You’re talking yields around 8%, which we saw around the COVID period and when Russia invaded Ukraine. So, a big reset higher for our total return to be completely wiped out in high yield.
To Souheir’s point, fundamentals are in an okay spot, but you’re likely to see dispersion going forward. So, there’s plenty of opportunities to exploit across sector and security—and it’s perfect for active management.
