Market Backdrop

October was marked by several events. A partial US-Chinese trade agreement along with a delay to Brexit until 31 January 2020 drove sovereign yields sharply higher and risk premia lower.

After lowering benchmark rates by 25 bps for a third and final time, the US Fed announced its monetary policy was now ‘on hold’.

In light of this, risk premia narrowed across all fixed income asset classes apart from those for High Yield. Third-quarter corporate earnings have been mixed and business leaders are sounding a lot more cautious. With yields moving higher, only the riskiest assets (subordinated and emerging debt) put in positive performances.

October remained a busy month in the primary market for corporate Investment Grade names, with volumes reaching €34 billion, up 26% compared with October 2018. Daimler, Pernod, SES, Alstom, Eni, Icade Santé, Unibail Rodamco Westfield, CK Hutchinson, Carnival, E.ON, Engie, Enel and Suez all came to market with senior debt and green debt offerings, some of which were multi-tranche. In terms of hybrid issues, two names stood out: Accor (with an issue including a repurchase of its 2020 hybrid call security) and KPN.

In financial names, Tier 2 issues dominated the primary market (including Abanca, Bank of Ireland, BPM, and Generali). Tier 1 saw La Mondiale issue its first RT1 (Solvency 2 compliant), while the AT1 segment welcomed issuance from AIB, which refinanced a scheduled 2020 call, and two first-time issues from My Money Bank and LBBW. On senior non-preferred notes, the secondary market remained very active throughout the month.

The earnings season has delivered a mixed bag with some names applauded (Klépierre, KPN and Ipsos) and others booed, namely Nokia, which revised its outlook steeply downwards. Several profit warnings were announced, including Imerys (placed on credit watch by Moody’s) and RCI Banque (driven by a profit warning from Renault).

Although S&P upgraded Greece to BB- with a positive outlook, it did not adjust any bank ratings. First indications of third-quarter banking earnings have not thrown up any negative surprises with margins generally appearing to stabilise and cost of risk remaining low.

With primary market issuance volumes very high (over €10 billion) during the month, high yield continued to consolidate. Individual bouts of bad news tarnished performance across the single-B segment.

Sector disparities in terms of performance resurfaced in October with good performances made in some, including Healthcare (Teva rose on the back of its proposal for a payment in kind in order to clear itself of looming opioid litigation cases), Energy, and Leisure. Jaguar featured among the best performers as it enjoyed sharply improved earnings. The fact that its shareholder, Tata Motors, recently raised funds through the equity market has also reassured investors over Tata’s ability to support the luxury brand.

The sectors that suffered most included Services (Europcar struggled following a serious profit warning due to Brexit and a bleaker European economy), Consumer Goods and Transport (CMA, CGM). Month-end saw Casino faltering as it announced debt refinancing plans that included a secured bond issue.

Outlook

Market Backdrop

Manufacturing PMI indices in some countries appear to be signalling the onset of more stable conditions. The US economy remains extremely buoyant.
Central banks continue to underpin the markets with accommodative monetary policies.
Financial and corporate sector fundamentals remain stable. The 12-month default rate is expected to deteriorate slightly.
Credit market flows are positive, especially within the investment grade segment, and largely capable of absorbing an active primary market.

Positioning

Low duration.
Peripheral zone overweight.
Subordinated debt offers attractive risk premia given the excessively low rate backdrop.
Within high yield corporates, we favour B-rated names and especially non-cyclical sectors.

The information provided is not intended to constitute investment advice and is for information purposes only. Data used in this paper is used in good faith but no reliance may be placed on it. All data contained herein is sourced by Lazard unless otherwise noted.

Past performance is not a reliable indicator of future results. The value of investments and the income from them can fall as well as rise and you may not get back the amount you invested.

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Completed on 15 November 2019.

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