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The wait for the European Central Bank meeting on the 10th of March characterised the last month of the quarter. The ECB delivered beyond what the market was expecting, although, concerns on the health of the European economy somewhat dampened the mood over subsequent days.
Furthermore, signals by the US Federal reserve that it was prepared to scale back the number of rate hikes for 2016 helped revive optimism in Emerging Markets. As a side-effect, the increase in confidence in Emerging Markets provided support for European equities.
On the ECB’s surprise announcement, yields tightened across all fixed income classes, primarily within the corporate investment grade front. Fixed income yields tightened further following the US Federal reserve’s accommodative stance.
In this environment European equity markets gained 3.3% while US equity markets gained 6.6% during the month of March. European High yield debt jumped by 3.7%, supported by tightening sovereign spreads, in addition to declines in credit spreads, as investors shifted their assets in risky attractive debt which had suffered a remarkable sell-off in the initial two months of 2016.
Moving forward, the second quarter should still be supportive for credit, primarily within the European area. However, bond pricing has already touched extremely high levels. Investment grade bonds are trading close to all-time highs, which is not particularly attractive from an investment point of view.
Equity markets are expected to remain under pressure despite support from quantitative easing. An uncertain economic growth outlook in Europe and the US, the risk of a hard landing in China, Brexit, and political instability are all weighing in.
A positive, in these market conditions, is that equity prices are probably well below fair value and for the long-term investor this is the time to start accumulating positions in good companies. The European high yield fixed income market is also worth considering given the support from the Central Bank and still adequate returns on investment.
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