The US credit market looks a safer bet than its European equivalent, according to independent research firm CreditSights.
In a report entitled ‘Seeking relative value between Euro and USD credit’, CreditSights predicts default rates in Europe will rise still further, and the time lag in the economic cycle makes the region a less secure prospect for investment than the US.
“Historically the US tends to lead Europe by six to 12 months in terms of the economic cycle,” says Simon Ballard, a senior credit analyst at CreditSights. “I think in that respect, it will recover ahead of the pack. That’s why you want to be focused more on US credit in the short term as opposed to European credit, which remains volatile.”
Moody’s Investors Service forecasts that the speculative grade default rate for Europe will peak at 10.9% at the end of this year, before falling to 6.0% by September 2010. In contrast, Moody’s predicts that the US speculative grade default rate will have fallen to 4.4% by September 2010.
Ballard says the Federal Reserve’s more aggressive stance in maintaining interest rates at 0.25% since December last year will help the US see economic growth and improved corporate credit quality before Europe. “The Fed, whatever Gordon Brown might try and tell you, was unarguably ahead of the curve in addressing the economic crisis,” he says.
Despite his optimism regarding US credit, Ballard thinks that a defensive strategy is still best for investors. “We believe the momentum behind the recovery story has overplayed itself, so we want to be in the less cyclical sectors that will be able to weather perhaps that second downdraft of the W-shaped recovery,” Ballard says. In terms of sectors offering stable cashflows, Ballard favours utilities, metals and mining, healthcare and pharmaceuticals.
Not all forecasters feel a solely non-cyclical strategy is necessary though. “The economic environment is certainly more benign than it was six months ago,” says Vasant Mehta, a credit analyst specialising in bonds at Payden & Rygel. “You can still get good spreads on some cyclical credits. These are companies that do not need double-digit top-line growth in order to survive and generate cash, even in an anaemic economic growth scenario.”
Both analysts agree, however, on the continued need for caution. “We want to avoid credits that are dependent on a very optimistic blue-sky economic scenario, as risks to the economic recovery remain,” says Mehta.
More on Structured Products
ESAs propose visual representations of risk in key information document
Regulatory panel suggests backtesting internally is best practice
Growing appetite for ETFs buoys market confidence
The region's exchange-traded funds take in $56.2bn by end of October
Loomis Sayles vice-chairman discusses the US credit markets
The US has recovered from recession but still faces an enormous debt burden. The onus is now on companies to pick up the slack in the economy and keep bonds buoyant
The head of European credit portfolio management at Pimco talks to Credit's Alex Monro about the ongoing Eurozone crisis, and the likely investment themes for 2011.
The European securitisation markets were among the hardest hit by the financial crisis: large losses on a range of securitised products led to a drop-off in investor demand, while prohibitive spreads made...
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.