For weeks now the “Greece tragedy” has been dominating headlines. At the end of this nail-biting test of patience eurozone leaders agreed on a last-minute compromise in form of (pre)conditions for a new Greek bailout package. In spite this being far from being a done deal as implementation risks are high, it is more than Greece which matters to markets. Lisa Backes, CIO and MD atYCAP Asset Management (Europe) looks beyond and analyses key market drivers and opportunities.
After the dust from the last Eurozone summit has settled the drifting-apart of monetary policy between the ECB and the Federal Reserve will remain another major topic throughout the rest of the year. The ECB is strongly committed to implement its expanded asset purchase program within the pre-established criteria and is expected to do more if required. In this context the ECB recently decided to add state-owned companies to its Quantitative Easing purchase list, demonstrating that they can still deliver surprises if they would like to.
Across the Atlantic, Fed chair Janet Yellen confirmed recently again that a first hike is still on the cards by year-end. With investors waiting for more clarity regarding the U.S. funds rates over the near term and in particular the precise timing, YCAP AM expects global volatility to rise ahead of an obvious change in US monetary policy. Much might depend on how dovish the Fed will act if they do raise rates.
Volatility creates opportunities to be exploited
Financial markets volatility is widely expected to remain elevated over the remainder half of the year. Even if Fixed Income is not immune, YCAP AM expects the asset class to be a good choice as recent equity market volatility speaks for bonds and pricing has become in the meantime more attractive compared to the lows seen towards the end of the first quarter of the year.
This applies on one hand to Investment-Grade, where yields are now higher after its underperformance during the first half of the year due to a combination of rising benchmark rates and risk premium. This also applies to High Yield which, thanks to a higher carry, offers a naturally higher buffer to price sensitivity in a more volatile interest environment – in particular for “true” BB ́s and in the single-B segment. YCAP AM has identified a series of candidates which offer attractive risk-/return profiles.
YCAP AM also sees the primary market as an opportunity with new issuances offering significant premiums over the secondary curve in anticipation of new issuance activity re-emerging and stronger volumes in the weeks and months to come.
“Prudent investors shouldn’t sit on the sidelines, but actively exploit opportunities provided by the more difficult market conditions“, says Lisa Backes, CIO and managing director of YCAP AM in Luxembourg.