Twelve months ago the European Central Bank initiated quantitative easing. But while it has inspired confidence in equity investors, has it had the same effect on the fixed income space?
Data from FE Analytics show the performance of a selection of Bank of America Merrill Lynch European bond indices has been mixed in the 12 months to January 15 2016, with the BofA ML Euro Government index only just delivering a gain of 1.6 per cent. The BofA ML Euro Corporate index fell 0.8 per cent and the BofA ML Euro High Yield index dropped 1.2 per cent.
Opportunities in European fixed income can be tricky to find, despite macro uncertainty having provided a boost to safer debt in recent weeks.
Rick Rezek, fund manager, US Credit at Schroders, notes in his global corporate bond outlook for 2016 that in spite of the ECB’s QE programme “the economic picture in the eurozone remains rather fragile”.
He adds: “The euro-denominated corporate bond market looks to be among the more challenging of the major markets to decipher as we enter 2016. While the ECB’s QE programme is arguably supportive of risk assets in the eurozone, much of this appears to be fully reflected in valuations. Frankly, it is very difficult to be overly enthusiastic about a broad market that yields well below 1.5 per cent.”
That said, European fixed income exchange traded funds have seen some popularity. Brett Pybus, head of iShares EMEA fixed income product strategy at BlackRock, says 2015 was a great year for fixed income ETFs: “They attracted $93.5bn (£65.2bn) in assets, a third of which was into European-listed products... Investors can access a wide range of sectors including government bonds, investment grade or high yield corporate bonds, and emerging market debt in just one trade.”
Others see opportunities in credit markets in particular, with Holger Mertens, global credit manager at Nikko Asset Management, noting: “The supply-demand situation [is] very favourable for European credit markets compared to other developed markets and should cause a rally in spreads.”
James Gledhill, head of European high yield at Axa Investment Managers, points out in 2015, European high yield was one of the few fixed income asset classes to have delivered positive returns, but admits it has not been a smooth ride.
“Spreads over government bonds reached a low of 360 bps at the end of February, before widening to 542 bps in the third quarter of 2015 as markets subsequently worried about Greece, the slowdown in China and the continued decline in oil prices,” he says.
“Spreads tightened in October and November in spite of some idiosyncratic risks in the European credit markets.”
He is optimistic on the outlook for high yield, suggesting continued QE is expected to push investors into taking more credit risk. “We believe that European high yield continues to be in a position to deliver strong risk-adjusted returns.
“The price returns have suffered in 2015, but strong income returns have seen the asset class deliver positive returns. Some risks are present, and rising, but prudent security selection can help outperform.”