Candriam Bonds Euro High Yield - fund comment December 2023
High Yield markets rallied strongly in Europe and in the US.
Market overview
Both bond and equity markets rallied strongly across the developed markets over the final month of 2023, driven by the
expectation of easier monetary policy as inflation fears evaporated.
The move was primarily triggered by the surprising dovishness of the Fed, that held rates constant, but did not push back
against market expectations that the Fed is done raising rates and may start cutting in 2024. In Europe, the economic outlook
is far less resilient than the US, with industrial production falling in Germany, Italy, Spain and France and confidence indicators
pointed towards further pain and industrials and manufacturing firms reducing investments and operating costs. On the other
hand, a downward surprise in November core HICP had even the notably hawkish council members concede that the
progress on inflation was encouraging and makes further rate hikes unlikely. The ECB held rates constant, and revised
inflation expectations for 2024 and 2025 downward as it expects inflation to decline gradually despite the upward pressure of
wage increases.
Fundamentals remains well oriented in Europe as illustrated by the upgrade back to investment grade of Lufthansa while the
picture is more negative in the US where we see more downgrades than upgrades.
Technicals remain very strong especially in Europe with limited supply on the primary market and Lufthansa leaving the
market at the end of year.
In this context, High Yield markets rallied strongly by another 50 bps both in Europe and in the US and spreads ended the
year at 400 and 325 bps respectively.
Portfolio highlights & Strategy review
In December, the strategy underperformed the benchmark.
Most of the underperformance came from our underweight positions in distressed situations like Atos (-0.05%) and Altice
France (-0.08%) and our underweight positions in the automotive sector (-0.09%).
In the current environment, we remain focused on leading players with a strong pricing power and a proven ability to pass
through inflation costs. We favor issuers with prudent capital management and credit friendly behaviors. In terms of sector
allocation, we maintain our underweight exposure to rate sensitive sectors (Real Estate, Chemicals and Construction) and
we remain overweight on defensive and energy intensive sectors (Telecommunications, Packaging, Healthcare and Utilities).
We maintained a credit duration and an interest rate duration in line with the benchmark.
Fund outlook
High Yield spread rallied strongly in the last quarter of 2023 and rates have already discounted a potential policy pivot which
have set up a challenging start for 2024. On the positive side, we continue to find High Yield spread in Europe attractive vs
the US and fundamentals as well as technicals remain very well oriented with large potential rising stars expected in the
coming months and very limited net supply from the primary market as M&A activity remain subdued.
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