The Eurozone offers better valuations for high yield bonds than any other region in the world, according to new research by NN Investment Partners (NN IP).
The research, conducted amongst NN IP’s panel of institutional investment managers, showed 27 per cent of respondents rated Eurozone valuations as strong or very strong while the US was cited by 22 per cent, the UK and Japan by 18 per cent each and Asia ex-Japan by 16 per cent.
More than half (54 per cent) of respondents expected institutional investor’ allocation to European high yield debt to increase over the next three years, versus 18 per cent who expected it to decrease.
Valuations were the most attractive attribute of European High yield bonds overall, with nearly two in five (38 per cent) of institutional investors saying this makes them significantly attractive versus other bonds, justifying the additional risk. Another 26 per cent of investors said falling default rates in Europe were supportive while 12 per cent believe the credit fundamentals of European high yield makes the sector attractive.
Sjors Haverkamp (pictured), Head of European High Yield at NN Investment Partners, says: “Credit spreads widened from May after risk aversion increased. However, they are still above what would be considered normal in the current cycle so some value may therefore appear in spread products. Investors will expect more than just value though – they will want to see fundamentals improving as well. In Europe, ECB monetary policy will no doubt be supportive but investors clearly recognise that credit fundamentals and falling default rates are supportive.”
“However, the high yield sector can be challenging: the credit fundamentals and liquidity are often more problematic and investors need to partner with asset managers that have the experience and processes in place to analyse these sophisticated markets.”
Whilst yield challenges remain, NN Investment Partners believes that there are still fixed interest opportunities without investors having to ramp up risk levels. Institutional investors will benefit from a partnership with fixed income experts who have a proven track record of identifying opportunity in adversity and translating that into returns. Indeed, NN Investment Partners’ investment process is based on detailed analysis of long- and medium-term fundamentals and has been honed over more than 20 years, aiming to provide its clients with consistently high yield.