KEY INSIGHTS:

  • Not a cycle reversal. We qualify the recent price actions as corrections, not as a cycle reversal.This position is mainly supported by past performance: profit taking is appealing when volatility increases.
  • Fundamentals. Credit fundamentals remain strong. We are at a stage in the economic cycle that looks generally rather beneficial for companies. In Europe in particular, the financial windfall has not been aiming at increasing leverage and default rates are expected to remain low.
  • Implications for investors in European credit markets. We think it is appropriate to maintain a low beta stance in Euro high yield while in investment-grade credit we favour banks and high beta.
  • Liquidity. Market liquidity should be watched closely at this stage. In terms of investment approach, we view it as appropriate to maintain liquidity buffers in portfolios, based on the potential that risk aversion could rise again in the market. Liquidity can be tactically repositioned in case of corrections.
  • Embrace an active approach. This correction opens a new phase in the market with higher volatility ahead. Flexibility and security selection will remain key.