Ismaël Lecanu is head of European credit IG & HY (investment grade & high yield) and senior credit portfolio manager at Axa Investment Managers. He shared his views on developments in the credit market with Paperjam + Delano Finance.
Marc Fassone: How is the credit market doing today?
Ismaël Lecanu: After an extremely volatile 2022, we have seen exceptional performances since October, with very strong credit spreads tightening.
Today, we are in the middle of the ford: investors can ask themselves whether there is still value in this market. For us, this is clearly the case. Firstly, because we are still above historical averages in terms of valuation and, above all, because the nominal rates offered are historically high if we look at the last 10 years. We have never been so high.
Are we seeing a rally or is this performance the expression of something much more structural?
We went too far down. As you know, the market always tends to correct its excesses and so it has gone back very sharply in the other direction. We are now in a consolidation phase. The trend for the next few months will be that risk premiums will continue to compress on the investment grade credit market, but also on the high yield side, especially on the short side.
We see these as good entry points into the market.
So investors can still get on the train?
Yes, part of the journey has already been made, but clearly there will be value for the next few months. Value driven by the nominal return side--the so-called carry rate--that the asset class will offer.
We are above 4% on the investment grade market, we are at 7% on European high yield. These are yield levels that are very protective for the coming cycle. So there is still a long way to go in this market.
How do you see the market developing in 2023?
Our starting assumption is that 2023 will not be similar to 2022. 2022 was the year of the nasty inflation surprise with yields rising sharply to put that inflation into prices. I think it would be a bad idea to think that 2023 will repeat the same ills as 2022. For fixed income, my vision is constructive: the disinflation cycle is here and will continue. It is not transitory. At the end of 2023, both headline and core inflation will be significantly lower than at the end of 2022.
At the same time, growth will still slow down. The combination of these two phenomena is promising for the bond market.
Can the actions of central banks challenge your scenario?
We see that credit dynamics, especially in Europe, are declining in the face of real increases in funding costs. Faced with lower levels of activity, the equation will become complicated for central banks. This should, in our view, prevent them from becoming more aggressive than they are today.
The other thing to consider is the reduction in central bank balance sheets. If inflation were to get out of hand, it could accelerate the pace of this reduction. This would be an element that could invalidate our scenario of falling yields in the interest rate markets.
With that in mind, which bonds do you prefer and which do you avoid?
We have a very constructive view on eurozone investment grade credit. Again, from a historical point of view, the nominal yields on these markets are very attractive: you can build portfolios with yields of 5%.
In the high yield market, given that we don’t expect a default rate higher than the historical average, we think that on the short end of this market, we still have investment opportunities.
Overall, on nominal rates as a whole, there is value in taking exposure to the eurozone.
There is one sector that we think is particularly interesting: banks. Banks that are benefiting fully from the new world with higher interest rates and a cost of risk that despite a slightly weaker economic scenario should remain under control.
This article was published for the Paperjam+Delano Finance newsletter, the weekly source for financial news in Luxembourg. Subscribe using this link. Read the French version of this interview on the Paperjam site.