- Covid-19 is expected to severely damage the European economy in the coming quarters. The answer at the European level to this disruption has been strong on the monetary policy side, with the implementation of the temporary Pandemic Emergency Purchase Programme of €750bn and targeted longer-term refinancing operations, and at the single country level, with targeted fiscal measures. At the EU institution level, we are at a crossroads: the next two weeks will be crucial to see if the political will to reinforce the Union will prevail in this emergency situation and what measures will be digestible by countries averse to any form of debt mutualisation or by worst hit countries averse to any conditionality on the emergency loans. Beyond the political debate, it is unlikely we will see the issuance of corona bonds in the short term as even in case of political agreement, the devil will be in the technicalities of the implementation. However, other (monetary and fiscal) tools are available in the Eurozone to address this emergency situation. A pan-European jobless reinsurance scheme now appears to be under discussion.
- The measures implemented so far have managed to partially calm markets. We spot considerable appetite for investments in the euro fixed income market: in sovereigns, which offer generous premiums on their syndication, and in the corporate market, with a flurry of primary issuance. This has been possible thanks to ECB action, and the situation is likely to improve going forward.
- Some points of attention remain. Liquidity is getting better, but it is not back to end of year conditions. A high level of fragmentation persists in the market: sector fragmentation (with some sectors more affected by Covid-19) and rating fragmentation. QE is directly benefiting the IG segment. With a large portion of the IG market rated BBB, we can expect some rating migration that will limit the eligibility of companies to the QE programme and therefore there could be differences in price action among different securities. It is critical from a credit research perspective to identify the companies that can withstand the crisis (our focus is on the liquidity of the balance sheet and the ability to operate the business to prevent or minimise negative cash flow) and exploit these fragmentations. We believe that there are and will be opportunities in the Euro credit area for corporates with sound balance sheets and resilient business models. The market reaction has not sufficiently differentiated high quality issuers from those more challenged issuers. We favour the short end and good quality credit ratings, where spreads have originally suffered most from the first pricing disruptions. We keep a particular focus on liquidity. This means both maintaining significant cash buckets and concentrating on high credit quality names. This remains a priority because it is the way to preserve flexibility in times of uncertainty and high volatility.The move towards normality is still long, but it has started.