European investors favour high yield to other sectors, Fitch finds

European fixed-income managers prefer to invest in high-yield bonds relative to other sectors, Fitch Ratings’ found in its quarterly credit market investor survey.

According to the research, conducted on managers of  estimated $7.2trn of fixed-income assets, over the last quarter high yield consolidated its popularity as the most favored sector, with 21% of fund managers voting it as their top investment choice.

“This is only comfortably higher than the 14% recorded at the beginning of the year. As a result, high yield stayed ahead of runners-up financial and non-financial corporates, voted the top choice by 17% and 16% of respondents, respectively,” Fitch said.

At the same time, investors’ outlook for high yield credit conditions remains negative.

“A greater proportion of fund managers expect conditions to deteriorate, 51%, up from 37% in the previous survey, while 40% of investors expect high yield issuance to increase, marginally down from 42% last quarter,” the agency added.

Survey respondents also became more pessimistic on the outlook for commercial bank lending standards for speculative-grade companies: 38% said standards will tighten further, reversing the more optimistic trend of the last two quarters since the European Central Bank LTRO.

Fitch believes European high yield will continue to receive support despite difficult markets, as investors who may be intolerant of low or negatively yielding European sovereign debt seek to bolster returns.

“The asset class outperforms even emerging-market bonds year to date, a pattern which has not happened since 2009 – contrary to the sell signal that recent negative monthly fund flows for the asset class suggests. May and June saw two consecutive monthly outflows totaling €2.4bn, the first outflows since November 2011,” the survey found.

Total return performance for European high yield touched 15.3% for the year on August 10, outpacing emerging-market corporate and sovereign debt at 13.2% for the first time since 2009, and against a 9.3% return on US high yield.

“Investors seem happy to retain existing holdings, while remaining reluctant to buy into new issues. Hence secondary market returns remain comparatively high, while primary new issue volumes remain anaemic. Everything is fine for the well-known, frequent ‘BB’ issuers with existing investor bases,” Fitch said.

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