Improving leverage could create a host of opportunities within European banks and Citywire A-rated Lisa Coleman is eager to capitalise.
Coleman, who runs several portfolios at JPM AM including the €5.2 billion JPMorgan Funds – Global Corporate Bond fund, said proposed corporate tax rates changes could be a big plus for investors currently concerned about leverage levels.
‘We remain wary of the negative impact elevated leverage can have on corporate fundamentals when growth eventually slows as the next recession approaches,' she told Citywire Selector.
Coleman, who is global head of investment grade credit, currently holds one European bank in the top ten holdings of the fund, Deutsche Bank at 4.2%, but said the team is especially keen on elements of the European banking industry.
‘We maintain an overweight position to credit risk in our investment grade credit portfolios and currently are positioned toward the higher end of the fund’s allowed allocation to high yield, which is 8% versus the maximum allowed of 10%.
‘We especially like European banks where we see improving fundamentals alongside attractive valuations down the capital structure.
'We’ve been rotating into subordinated areas of a bank’s capital structure where one can capture securities, like Additional Tier 1 (AT1) CoCos, offering an attractive yield and spread pick up.’
Credit risk premiums
With valuations hovering around the tighter end of historic ranges, Coleman said investment grade corporates will benefit from continued technical strength across the market as we move into 2018.
‘Credit risk premiums are nearing decade-low levels, making high-quality credit valuations look vulnerable. After all, the year so far has been full of nothing but upside surprises for global corporate bond markets.'
Coleman said the underpinning factors – which sees investment grade in high demand globally – suggest it would be premature to leave the party just yet.
‘The interesting opportunities for investment grade credit today are in financials that have built up their balance sheets, like US and European banks. The European Bank AT1 market provides a fertile hunting ground, as Europe is doing quite a good job cleaning up bad loans held at banks.’
Coleman said owning high yielding AT1 bonds of certain issuers, which are characterised by strong or improving fundamentals provides an opportunity for investors to benefit from compressing yields.
‘It’s not just the banks that issue subordinated bonds, industrials do too in the form of corporate hybrids, which offer yield far in excess of the benchmark average and offer an attractive place to benefit from Europe’s improving fundamentals and robust growth backdrop.
‘In an environment where spreads can continue to grind tighter, it feels early to be positioned for a liquidity reversal. Instead, investors focusing selectively on higher beta trades in credit are better poised to take advantage of market conditions.’
Over the three years to the end of October 2017, the JPM Global Corporates Bond fund returned 10.97% in US dollar terms.
This compares with a 12.48% rise by its Citywire-assigned benchmark, the Bloomberg Barclays Global Aggr Corporate TR USDH, over the same time period.