Macro Backdrop
Sentiment was weaker in March, with spreads on EUR investment grade (IG) corporates 7 basis points (bps) wider on the month. Sentiment was firm initially on the back of German and EU fiscal stimulus news, leading to spreads touching 85 bps. Markets were weaker during the remaining part of the month, with spreads ending the month at 97 bps. Trade war was the key focus over the month, as successive news flow around tariffs led to growing concerns around a potential macro shock. Macro data releases in the US were mixed, with early signs of weakness – leaving a question mark over the impact of geopolitical uncertainty on the US economy. German bund yields surged on the back of fiscal stimulus in Germany, with 10-year yields up 33 bps to 2.74% (after peaking at 2.9%), while US treasury yields were unchanged. On the central bank front, the European Central Bank (ECB) delivered a 25-bps rate cut as expected, while the Federal Reserve (Fed) had a more dovish tone than expected. Technicals turned weaker, as higher rates volatility weighed on demand for credit and issuance has been heavy in March. EUR IG corporates, as measured by the Bloomberg Euro Aggregate Corporate Total Returns Index (EUR), were negative on the month (-1.0%), driven by higher rates and a moderate widening of spreads.
Performance
The fund’s NAV (Institutional class, EUR) was down by 1.3% during the month. In March, financials underperformed non-financials, with spreads widening by 10 bps versus 7 bps). Tier 2 bonds (Tier 2s) from banks and insurers underperformed, widening by 13 bps as the riskoff tone led to decompression across the capital structure. EUR-denominated Additional Tier 1 Contingent Convertible bonds widened by 35 bps in March, while bank seniors widened by 9 bps. Top performers were mainly short-dated bank senior and Tier 2s that were less impacted by higher rates and widened credit spreads. Bottom detractors were mainly longer-dated bank senior and insurance Tier 2s.
Positionning
Issuance of green bonds from the European financial sector was seasonally high in March, with USD 5.5 billion printed, up 80% year-over-year (YoY) and above the 5-year average of USD 4.1 billion for March. The last set of Q4 earnings were strong, coming above consensus expectations on average, while credit metrics remain robust. On the banking side, Allied Irish Banks (AIB) delivered impressive results – FY 2024 net income up 14% YoY as net interest income grew by 7%, resulting in a 26.7% return on tangible equity (RoTE). Asset quality was very resilient as loan loss provisions declined materially to 8 bps of loans and non-performing loans (NPLs) declined by 0.2 percentage points (pp) to 2.8%. The group’s capital position declined by 0.7 pp to a strong 15.1%, representing a 3.7% or EUR 2.3 billion excess capital. The sector’s fundamentals are expected to remain very strong, with an anticipated circa 11% return on equity in 2025 and 2026. On the insurance side, Q4 earnings were strong as well. For example, Generali reported an 8% growth in operating result in 2024, 12.4% return on equity. The group’s solvency ratio remained robust at 210%, equivalent to EUR 26 billion of excess capital.
Outlook
We remain positive going forward – with attractive spreads against a backdrop of very strong credit quality. We continue to see financials as the most attractive part of the market, with rock solid fundamentals and earnings that have benefitted from the normalisation of interest rates. With a yield (to next call) of around 3.8% and an average spread (G-spread) of circa 125 bps on the fund (compared to 3.3% / 97 bps for the EUR IG corporate market), we see this as an opportunity to capture high income with further upside potential from tightening spreads. This is despite the highquality bias of the fund, which has an average bond rating of BBB+ and an average issuer rating of A.
