CONTRIBUTORS
David Zahn, CFA, FRM
Senior Vice President, Head of European Fixed Income
Financial markets are experiencing extreme volatility, and this is certainly the case in European fixed income markets. The usual safe haven provided by government bonds has been brought into question by the raft of fiscal measures unveiled by governments, combined with a European Central Bank (ECB) that looks behind the curve in dealing with the crisis.
All credit markets are under stress and operating in price discovery mode due to poor liquidity, presenting opportunities for investors with a longer time horizon. At present, we feel the broad selloff has failed to distinguish fundamentals, but we continue to closely monitor markets. The European high-yield market and subordinated financials are under the greatest pressure. That said, European bank balance sheets are generally very strong, and we take comfort from the large fiscal and liquidity support package announced to date, as well as the regulatory flexibility shown by the ECB which should help to mitigate the economic impact of the outbreak.
Growth in the eurozone is being hit very hard, due to the Covid-19 isolation procedures being put in place and is currently at recessionary levels. However, we believe that the fiscal and monetary responses should allow the economy to recover to current levels once the crisis has passed, though the timing of that rebound is very difficult to determine. The main opportunity/risk for the eurozone in this environment centres on the ability of its leaders to pull together and create a truly unified European approach to tackle the crisis. This has not happened in the past, but maybe this crisis will galvanize Europe to come together. If this unified response does not occur, then the risks of another eurozone financial crisis will escalate.
In the majority of our European Fixed Income portfolios, we are very liquid and have large cash positions. Allocations are mainly in government bonds, with small exposures to high-yield and investment-grade credit, which is positive in terms of liquidity and repositioning, but given the current selloff in the government bond market is not very helpful in the short term. We will continue to be dynamic in managing our portfolios and will look to reposition, as opportunities and information allow.
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