Credit Quarterly : H2-19 Credit Allocation

RETROSPECTIVE OF Q2-19 PERFORMANCES The credit market’s rally carried over, even accelerated in April, before the trade war took its toll once again in May. The lull since the start of June and the change in the tone of leading central banks did nonetheless enable credit to post an excellent performance in Q2-19, with total returns ranging from 2% to 5% and, notably, an outperformance by High Betas. WHAT APPETITE FOR CREDIT IN H 2-19? Af ter such performances, some profit-taking would appear in order in the case of the credit market, especially since clouds are gathering overhead on the geopolitical front (tensions heightening in the Persian Gulf), also in Europe (no-deal Brexit looking increasingly likely) and at macroeconomic level (slowdown in China and, especially, in the United States that should become more pronounced in H2-19). For the credit market, will discretion be the better part of valour? While the risks highlighted above are very real and susceptible in turn of triggering idiosyncratic risks (financial sector, auto sector, in the UK the retail and leisure sectors, etc.), valuations do still appear attractive, notably for non-financial corporates... especially since, if global growth does slow faster than expected, this segment stands to benefit from central bank support (eventual implementation of new asset purchase programmes). WHAT CREDIT ALLOCATION FOR H 2-19 ? We have identified below four main themes to guide credit allocation in the com ing six months : (1) Overweight cash relative to CDS, in particular in the HY segment , given the significant relative value differential compared with our models and the combination of an interest rate effect and central bank support. (2) Give preference to corporates over financials, in particular in the High Beta segment s given the compression in the spread differential, notably between AT1 and HY. (3)  Give preference to Low Betas over High Betas in the financial segment but opt for a butterfly strategy on corporate s (buy senior HY and, to a lesser extent, senior IG at the expense of corporate hybrids). (4) Give preference to € credit over $ credit, notably in the HY segment.