Investors are optimistic about euro high-yield (HY) in 2Q, with more than half of respondents to Bloomberg Intelligence’s latest HY investor survey expecting very low defaults. They are also expecting 15 billion euros of index-eligible supply and positive returns despite a strong 1Q.
Investors remain overweight HY, even as a majority fear rich valuations. Two thirds (67%) have more than 3% cash in their HY portfolios, which would help digest strong supply, believes BI. An even greater majority expects HY to beat high grade in 2Q.
According to Mahesh Bhimalingam, BI Chief European Credit Strategist: “Central bank policy and Covid 19 lockdowns and vaccinations are viewed as more critical than fiscal policy or rising rates for HY returns in 2Q. As the pace of vaccinations vary across Europe, our respondents remain sceptical about governments getting their acts together. But default expectations are lower than in our last survey.”
The BI study, Euro High-Yield 2Q Survey: Rich But Still Overweight, finds that investor conviction in HY seems to have dropped since 1Q.
Some 56% of survey respondents believe HY will deliver positive returns, vs. 73% before. Notwithstanding, the majority is still overweight HY, despite no respondents believing HY valuations are cheap at this stage. A majority believes that HY valuations are more rich than fair.
Mahesh Bhimalingam added: “There is a clear preference for Bs in this survey, continuing the theme from 1Q, while the underweight for investment-grade (IG) has only accelerated. CCCs aren't much liked either, while the market seems split on BBs.
“Cyclicals have come up strong in the sector preference, while communications is the least-preferred sector going into 2Q. There is nearly a perfect tie between U.S. euro HY, whereas the U.S. was the 1Q favourite. A majority, 77% vs. 80% before, believe HY will beat IG again in 2Q.”
