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Watch out for M&A in Europe, says A-rated manager

Watch out for M&A in Europe, says A-rated manager

The ECB's imposition on European bonds has thrown up opportunities from M&A activity for fixed income investors, Citywire A-rated Lisa Coleman has said.

Speaking to Citywire Selector, Coleman, head of global investment grade credit at JPM Asset Management, said there was stability in Europe for fixed income investors but oversupply may negate some of the upside.

'With low all-in-yields, are we likely to see more shareholder friendly activity coming on for Europe? A pretty big M&A pipeline has built up and is looking for financing within the European market.

'With more M&A activity, maybe you will see a bit more shareholder friendly activity,’ Coleman said, who also runs the JPM Global Corporate Bond fund.

Coleman said the growth in issuance under the ECB's QE programme within corporate bonds meant ample supply coming to the market.

'If we look back at 2015 -2016, looking at index-eligible supply it was up almost 30%. We expect another pretty good year for growth supply again in 2017, so that may limit some of the upside that we could see in Europe.'

Coleman has allocations to various European countries including the UK (11.1%), France (6.2%) and Germany (2.95). She added that, compared to the US, valuations in the European market were lagging due to uncertainty about the political outlook.

'It is hard to forecast political outcomes. So I think you have to come back to each company on an individual basis and do the best you can to understand what their underlying business fundamentals look like,’ she said.

'It is easy to get caught up in the headlines in politics but at the end of the day you have got a portfolio to invest, you have got a benchmark against which you are measured. You have to make the best decisions you can by looking at the underpinnings of the companies you wish to invest in.'

US fundamentals

Away from Europe, Coleman’s largest country allocation is the US at 61.3%. She said credit fundamentals for US issuers had deteriorated but were improving and were showing signs of stabilisation.

'We suspect that when we are finished with fourth quarter earnings results, we are going to see some ongoing improvement in fundamentals.

'That is important, as if you are starting to see a trend towards declining year-over-year growth of debt for US companies and a faster rate of improvement in growth of revenue and EBITDA that can lead to deleveraging.

'If you then overlay on that the potential for US GDP growth, our forecast is coming in for 2017 around 2.5% real GDP growth, that is actually a pretty good environment in which companies continue to do a bit better on the fundamentals side,' Coleman said.

Over three years to the end of January 2017, the JPM Global Corporate Bond fund returned 10.01% in US dollar terms. This compares to a rise of 12.40% by its Citywire-assigned benchmark, the Bloomberg Barclays Global Aggr Corporates TR USDH, over the same time frame.

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