High yield chief Alexis Renault has reduced exposure to European companies with significant emerging market exposure due to fears of further volatility.
Renault, who works for BNY Mellon subsidiary Meriten Investments, has also been reducing duration across his portfolios and increasing single B-rated holdings.
At the same time, Renault has gone underweight BB-rated bonds in the BNY Mellon Compass Euro High Yield Bond fund, which he believes now have an unattractive risk/reward profile.
Speaking to Citywire Global at BNY Mellon’s Paris fixed income conference, Renault said: ‘We like defensives such as telcos that are in recovery mode. We did have a big focus on core Europe but a lot of manager’s focus is now on peripheral European companies with emerging market exposure such as Telefonica.’
‘We believe emerging market volatility will come back so many funds have too much exposure to emerging markets but we are trying to control it.’
Renault said while leverage on new issues in the asset class is increasing, it is nowhere near the levels seen just prior to the global credit crisis. He also thinks fears over a bubble forming in European high yield are overdone, despite the asset class returning 175% since 2008.
He said: ‘Liquidity is a little worse but not too worrying over the next 12 months. The average leverage now for new issues is 3.5 times, while it was 5.5 in 2007 so this does not feel like a bubble in high yield.'
‘As long as there are no serious geopolitical risks such as a worsening of the Ukraine situation and rates stay low, we think a return this year of 2-4% in euro high yield is likely.
No go LTRO
Renault also expects Draghi to disappoint the market with his LTRO plans, which could lead to further volatility. ‘To increase inflation in the eurozone by 0.4% to0.6% the ECB would need to spend €1000 billion.’
Renault says that European high yield is less volatile than its US counterparts and thinks 2-4% is the likely return for European high yield, albeit with some near term volatility factored in due to forthcoming ECB announcements.
‘The technicals for European high yield remain good but over May and June we may see more volatility. Over the past 10 years in 90 of cases there has been a mini correction in June. If the volatility goes up we would look to invest in shorter duration.’