Time to back credit as ECB recovers its mojo

The recent move from the European Central Bank (ECB) will be a shot in the arm for the investment grade credit market, according to Stephen Jones, CIO at Kames Capital.

On 10 March, the central bank revealed not only will it boost its asset purchase programme by €20bn a month, but from Q2 onwards it will also include unsecured debt from companies outside the financial sector.

If people were worried the ECB had lost its mojo, all doubts were put to rest with a substantially larger programme than expected.

The market was impressed but it was also scared. The ECB’s move was a very strong statement of intent to tackle what it clearly sees as a weaker economic environment in Europe, with low growth and low inflation across the region. It is taking the deflation threat exceptionally seriously.

The ECB’s move sees it shift away from government bond markets into the real economy by lowering borrowing costs for companies, and giving banks generous access to cheap funding that can support lending as far ahead as 2020.

This action should prove supportive of risk assets and wider market confidence over the longer term, and this is already being reflected in contracting credit spreads.

There is a big new buyer in town for at least the next year, and it is price insensitive. We have already seen the powerful impact asset purchases by central banks such as the Bank of England and Bank of Japan can have on corporate bond markets. So we expect the performance of European corporate bonds relative to government bonds to be fairly robust from here.

The major winners from the ECB’s bond-buying programme will be companies in Northern European countries, especially France and Germany while, at the sector level, utility companies could do well. This combined with the targeted longer-term refinancing operations (TLTROs), which will help banks on the European periphery, should prove an effective combination.

This supports the case we have been making for investment grade credit on a valuation basis, and high yield will also benefit as the price comparison there gets ever more attractive.

In future, the ECB’s measures should also support equity markets as economic growth improves. At this stage it is a credit story rather than an economic story. But if this sort of action works, and we hope it does, real assets come in to their own as growth normalises.

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