New report shows that increased risk aversion stemming from Eurozone debt crisis has generated attractive investment opportunities in high-yield corporate bonds within Euroland.Key findings: - The European high-yield corporate bond market has been affected by a simultaneous rise in government spreads, rise in high-yield spreads and a high volatility in the stock markets.
- Historically high spreads in the high-yield market reflect overall risk aversion rather than its fundamentals.
- Many high-yield corporate bonds appear to be mis-priced relative to fundamentals.
- High-yield bond investors should take a selective approach on sectors and geographies.
The worsening creditworthiness of governments, whose issues had been deemed “risk-free”, is affecting the perception of risk related to listed companies and their bond issues according to a new publication of Allianz Global Investors. Today, high-yield bonds offer high spreads, greater than those seen at the beginning of 2011. They are also characterized by particularly high volatility, despite the fact that the default rate remains particularly low, which is clearly inconsistent. Current trailing 12-month default rate in Europe is around 1,6% according to Standard & Poor’s (S&P) and for the next 12 months is expected to be revised upwards to 6% in their baseline scenario (and revised up to 8,4% in a worst case scenario) which is still well below the peaks reached in 2009. Olivier Gasquet, capital markets analyst at AllianzGI and author of the publication, points out that high-yield bonds are less susceptible to interest rate risk compared to government bonds. Investors should therefore focus more on possible changes in the creditworthiness of the issuer. Generally more volatile and less liquid than government bonds, stress in the financial markets has accentuated the impact on high-yield bonds which leads to mis-pricing compared to their fundamentals. Alexandre Caminade, Chief Investment Officer Credit Europe at Allianz Global Investors, comments:"The technical outlook for high-yield bonds looks attractive. The current spread of 700 basis points* implies a 5-year accumulated default rate of 43% whereas the long-term average for B-rated bonds is actually
17%**. Also, the refinancing volume for high-yield issuers in 2012 is relatively low with a total of 6.9 bn EUR which is rather positive for the demand."
"However, a thorough bond selection process is today more important than ever. I remain cautious on banks, cyclicals and issuers from the eurozone periphery. From a sectoral perspective I prefer rather stable non-cyclicals such as food, healthcare, telecom and cable companies that are able to maintain cash-flows even in a challenging environment."
"The recent downgrades of sovereigns in the eurozone were widely expected and consequently, market prices already reflected the downgrades. It is to note that Portugal enters the high-yield universe however."
Alexandre Caminade, who manages the Allianz Euro High Yield Bond portfolio and is supported by a team of 4 dedicated high-yield analysts and a portfolio management team of 11 investment professionals, currently focuses on higher rated BB bonds. Only a quarter of the portfolio is held in B rated high-yield bonds.* Source: Xover Index, a proxy for the high-yield market
** Source: Standard & Poor’s For further information please contact:Stefan Lutz, Telephone +49 69 26314276, Email: stefan.lutz@allianzgi.de Marc Savani, Telephone +49 69 26314206, Email: marc.savani@allianzgi.de Emma Taylor, Telephone +44 20 7065 1526, Email: emma.taylor@allianzgi.co.ukAbout Allianz Global InvestorsAllianz Global Investors, an integral part of Allianz SE’s asset management business, is a trusted partner for clients across all major asset classes and regions. AllianzGI’s teams can be found in 19 markets worldwide, with a strong presence in the US, Europe and Asia-Pacific. With approximately 650 investment professionals and an integrated investment platform, AllianzGI covers all major business centers and growth markets. Its global capabilities are delivered through local teams to ensure best-in-class service. Generating an information advantage is fundamental to AllianzGI‘s investment philosophy and is achieved via specialized in-house research teams across the globe. AllianzGI provides one-stop solutions for complex client needs bringing together proven competencies in investment strategy consulting and analytics, risk management as well as pension investing and related-vehicles.Disclaimer
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