Luca Paolini, chief strategist at Pictet Asset Management, explains recent allocation changes in response to the ECB’s QE starting;
“As the ECB prepares to launch its quantitative easing programme, we have increased our exposure to European high-yield bonds to overweight.
“The asset class looks appealing on a number of fronts. First, QE will boost the allure of instruments offering attractive single-digit yields. With as many as one in four euro zone government bonds offering negative yields and investment grade bonds yielding barely above 1%, investors looking for income have little choice to but to move into lower-rated credit.
“Second, economic developments should underpin the credit credentials of issuers of European high-yield bonds. With the euro zone economy likely to grow by some 1.4%, the revenue and earnings prospects of speculative-grade borrowers should remain solid.
“Third, valuations are attractive: the yield pick-up currently offered by high-yield bonds is more than sufficient compensation against the risk of default. The market implied 12-month default rate is approximately 5.7% – against the trailing 12-month rate of approximately 2% Encouragingly, flows into high-yield bonds have picked up in recent weeks.
“Our positioning in European government bonds reflects our belief that the euro zone policymakers are at last getting to grips with the problems facing the region. Although Greece’s exit from the euro zone is not our base case scenario, the region is better equipped to deal with this outcome than it was a few years ago. It has constructed a robust backstop facility while the ECB’s QE programme should offer additional support.