Jueves, 27 de Octubre de 2016 Redacción

The European Credit Strategist: The stress of success
•   With populism on the rise, we think "domestic credits" look set to outperform "exporters" in 2017
•   The winners are likely to be telecoms, utilities, insurance and banks - the main domestically-focused sectors
•   An unnatural state that still exists in credit is bank senior spreads trading wider than corporate spreads

The big inflection point?

2016 started off as the "year of deflation". But the recent rise in inflation expectations suggests that it could end more as the "year of inflation". We think bond tantrum risks remain contained in Europe, however, given Draghi's recent dovish soundings and record investors shorts in core Euro duration. Yet, rising inflation expectations will only serve to keep ECB tapering noises rumbling in the background. 

The real reach for yieldlies ahead…

In credit, another inflection point has been reached recently. Credit total returns have finally surpassed those of German bunds. We think this is important, because while bund returns were so impressive over the last year investors never genuinely needed to "reach for yield" in high-beta parts of the market. Consider that the 200bp tightening in European high-yield spreads this year has happened amid a $7bn outflow from the asset class. Now that total returns in high-beta credit are starting to stand out - and flows follow returns - we expect a more powerful reach for yield to begin. We think corporate hybrids and European high-yield should benefit.

Domestics over exporters for 2017

The election and referendum calendar in Europe remains plentiful over the next year. Populism is therefore a constant theme going forward, in our view.But populism has likely been breeding some forms of protectionism. The WTO forecasts global trade to fall to just 1.7% this year, below the level of global GDP - historically a rare occurrence. Thus, in 2017, we believe that domestically-focused credits stand to outperform those that are more export-orientated. Our revenue screens show that the main domestically-focused sectors are retail, telecoms, utilities, insurance and - importantly -banks (where BIS data highlights the extent to which banks have "retrenched" post-Lehman). 

An "unsteady" state: banks vs. corps

A fresh wave of investor buying of banks would be welcome. An"unsteady" state that exists in credit at the moment is that bank spreads tradewider than corporate spreads. A new TLAC regime hasn't helped,but Draghi's corporate bond buying hasbeen a big catalyst, we think.However, wide bank spreads pressure the outlook for banks' lending volumes, especially if negative yielding debtis a funding alternative for big corporates. Bank senior spreads are currently much wider than corporate spreads in Germany and Italy (and to a lesser extent France). So a tightening of bank senior spreads here would be most welcome.

Could the ECB fix the problem?

Gilles Moëc, our European economist, argues that the bar is still very high for the ECB to engage in purchases of bank senior bonds. While not his base case for the December ECB meeting, he does argue that if the ECB cannot come to an agreement on tweaking the capital key, then the powerful alternative of buying bank bonds could be considered. Digging down into the ECB eligible collateral list (and applying some simple filters) we find €800bn of bonds available - a number similar in magnitude to the CSPP programme. Interestingly, there are plenty of German bank bonds (€313bn) on the collateral list, which could serve the ECB well as they look for a "substitute" for bunds.

See report (attached) for further information.

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