There will be a host of government downgrades in 2013 which will weigh heavily on those attempting to find opportunities in corporate debt, according to Henderson’s Chris Bullock (pictured).
The Citywire Euro Stars AAA-rated manager, who co-runs the €1.19 billion Henderson HF Euro Corporate Bond fund with Stephen Thariyan, made the comments in an investor note on the outlook for the asset class in 2013.
Bullock said persistent sovereign debt difficulties will remain a key factor this year and lead to the development of a ‘two-speed Europe’ when it comes to growth and investment opportunities.
‘When we look at the likes of Spain and Italy it is likely budget targets will have to be put back and they are not going to meet their targets,’ he said.
‘This will weigh both on investor sentiment and the fundamental outlook for the companies involved. So more of the risks probably lie to the downside in terms of both growth and credit ratings.’
‘In fact, we think we will see more and more government bond downgrades over the course of the year. Some of those ratings downgrades will have less of an impact on the market but there are some especially Spain, which could have a much more significant impact on the market.’
At present, Bullock and Thariyan currently have positions in both the Spanish (5.1%) and Italian (7.6%) corporate bond markets, although they hold no sovereign debt exposure.
These concerns over the sovereign debt outlook and its impact on company performance has led many investors to wrongly infer there is a bubble in credit, Bullock said.
‘We have certainly been asked by a lot of people, is credit in a bubble? I think the short answer for that is no, we think that government bonds are expensive and it is this that is making the yield on corporate bonds relatively expensive as well.’
In terms of the corporate credit outlook as a whole, Bullock added that he anticipates a high level of new issuance in the European credit market over 2013.
However, he said he also anticipates exceptionally high levels of competition for this paper.
‘We think the new issue market will be relatively active, particularly corporates, where we are going to see a lot of new names which would have gone into the bank market, now coming into the bond market.’
‘That new issuance market does provide an opportunity for investors to get involved in those deals that do look attractive.’
The Henderson HF Euro Corporate Bond fund has returned 31.39% in the three years to the end of January 2013. This compares to its Citywire benchmark, the Markit iBoxx Euro Corporate TR, which rose 17.65% over this period.