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Undoubtedly investors weren’t expecting such a harsh negative momentum in the initial months of 2016. Market instability prevailed, equities plunged, spreads widened across the board, while safe havens surged. The 10-year German Bunds re-tested low level of 0.18 per cent, just shy of 11 basis points from the 0.07 per cent levels record lows touched in April 2015.
In 2015 European high yield debt managed to outperform its U.S. peers by gaining a total return of 1.5 following the intra-year highs of 3.8 per cent touched at the end of November, which than were hindered by the market interpreted delusion of non-action by the ECB in December.
In line with market volatility, European high yield debt commenced 2016 on a sour note, as till date the said asset class returned a negative return of 2.8 per cent, the lowest levels which were last seen in October 2014.
The witnessed instability across global markets, also emerged as a drag for high-yield bond issuance in EMEA countries, which has hit its worst January record since 2009, as market conditions remain challenging.The was clearly visible, as high-yield bond issuance was USD1 billion in January 2016 compared to USD14.9 billion in January 2015.
High-yield market activity has dwindled even further in February due to added equity market volatility, the slowdown in emerging markets led by China, and currency volatility.
In addition, corporates within the EMEA zone, which operate within the oil and gas industry and the mining industry are being hammered by distressed commodity prices. In this regard, cross-sector indicators such as the Liquidity Stress Index and the share of issuers rated B3 negative and below, according to Moody’s, also continue to rise.
In line with the said adjustments and with possibly more falling angels in 2016, the speculative-grade universe could broaden significantly over the year.
Let’s now look at the positive side of the story. Across corporate sectors in EMEA, the majority of outlooks remain stable with relatively low refinancing risk and some EBITDA growth expected for most sectors, particularly consumer-facing industries, in line with further disposable income.
Certainly, despite the fact that over the past months European high yield debt traded at higher yields, fundamentally from a credit strength perspective, selectively, certain corporates still hold below average leverage, in line with moderate EBITDA growth, and remarkable interest coverage.
In addition, another positive aspect is that in 2015 corporations managed to re-finance at lower levels from the originally issued coupons. This was surely another positive for high yield companies which reduced their interest expense. This is supportive both in terms of growth, as well as to an improvement in capital structure.
Thus following the witnessed correction within the said asset class, and in line with selective strong credit fundamentals, it might be appropriate for investors to dip-in at the current opportunistic levels. That said investors should be aware, that despite the high yield market is not as volatile as the equity market, it still bears a considerable amount of risk.
Thus if investors would not want to carry any specific individual risk, they can still benefit from the returns generated by the high yield market by considering high yield funds, which offer a distribution of income, in addition to a well-diversified allocation which should limit idiosyncratic risk.
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