2019 will comfortably claim the record for corporate issuance in euros, with the first 11 months of the year materially eclipsing the entire figure for 2018 (€370 billion compared to €265 billion). The insatiable appetite for corporate treasurers to issue debt has been met by a similar – arguably considerably greater – demand on the part of end-investors to buy the debt being issued.
The structural fundamental reasons behind these trends – namely persistently low (and in some cases negative) interest rates, a moribund global economic outlook and a correspondingly cautious cohort of central banks – show no signs of disappearing. Faced with the alternative of (in many cases) paying a bank to hold their cash, the incremental return of buying corporate bonds remains a relatively attractive option for investors. The long-term structural support for fixed income assets is therefore certainly compelling, and should continue to underpin demand for corporate bonds. So far, so easy…but what about the politics stupid?
Forecasting the impact in recent years of geopolitical events on risk markets has been something of a mug’s game. The well-intentioned and earnest corporate bond manager will typically be asked to comment on what are perceived to be the biggest threats to the asset class, and then make an educated comment (guess) on the likelihood of each outcome occurring, and what their impact would be on credit spreads. The last four years have provided ample opportunity to engage in this charade, with at various times Brexit, a Trump presidency, Italian politics and various EM crises (among many) cited as being the (unlikely) event that would precipitate the sell-off. None of this is to underplay the risks of an unanticipated event roiling markets. It is more of an attempt to acknowledge that if and when a sell-off occurs, it is rarely the consensual risk event that causes the sell-off. Predicting such an event is therefore beyond the capability of most.
Taking the long-term structural support for the asset class as read – and in the spirit of avoiding the afore-mentioned (and well-trodden) rabbit holes – what should the focus for corporate bond managers be in 2020? Without making any prediction on what the next iteration of Brexit (or UK politics) will look like, UK-domiciled entities will probably again be one of the focal points for credit investors. UK financials will continue to be hostages to how Brexit plays out. It is difficult to argue that they won’t continue to trade with a mild risk premium over the rest of the sector, but they should offer opportunities as perceptions over Brexit ebb and flow. Even after the rally we saw in the fourth quarter of 2019, there is still arguably scope for spreads in these names to rally further, in the short-term at least. It’s also possible we may see other UK domestic plays (including utilities) recover, as the UK risk premium dissipates against a more certain political backdrop.