MARKET REVIEW
The decline in oil prices continued into December with equity and high yield markets reacting most keenly to the likely negative impacts. Elsewhere, government bonds and high grade corporates remained sanguine focusing more on the implications of a possible Greek election in the new year and likely quantitative easing from the ECB. German bond yields reached new lows, boosting returns as corporates rallied in line. Economic data from the euro area continued to highlight on going disinflationary pressures. November CPI came in at 0.3% (year-on-year) down from 0.9% one year ago. With interest rates at record low levels, new issue markets in European high grade credit remain strong with gross issuance for the full year 2014 the highest since 2009.PORTFOLIO ACTIVITY
Despite the stronger month for new issuance we were selective inadding to new positions. We bought the new Deutsche Annington hybrid issue and added to our relative value preference for Lafarge versus Holcim. Otherwise, sector positioning was unchanged with our small overweight credit bias intact.OUTLOOK
The oil price move will continue to impact lower-rated producers more than higher-rated ones and this may remain a theme as we head into 2015. The boost to consumption may take longer to filter through as a net positive for risk though, so we would not adjust positioning dramatically. The persistent weak data in Europe, reflected in ever lower bond yields and a weaker currency, makes a further expansion of the ECB balance sheet a given – this may well be priced by markets already so we would not chase spreads from here. With political risks likely to rise (Greek elections, Russia and oil), a more stable macroeconomic trend needs to emerge before spreads can tighten again. That said, the key drivers for a positive view on credit – high corporate cash levels, cheap financing, low wage growth, declining commodity prices etc. – remain in place. We stay positively disposed to the asset class in a “lower for longer” environment.
