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#04 April CROSS ASSET 2021 Investment Strategy CIO VIEWS Bubbles, tantrums and the revenge of value THIS MONTH’S TOPIC Fixed-income markets: from cyclical to structural challenges Document for the exclusive attention of professional clients, investment services providers and any other professional of the financial industry
CROSS ASSET #04
INVESTMENT STRATEGY
#04 - April 2021
Table of contents
Global Investment Views
CIO Views Multi-asset
Bubbles, tantrums and the revenge of value p. 3 Recalibrate risks within the “pro-cyclical” paradigm p. 5
Rising UST yields amid hopes of economic recovery are causing the markets With growth narratives confirming our moderate risk-on stance, we see
to question whether the Fed will pause its bond-buying programme. We don’t opportunities in DM equities and a realignment in the EM FI and FX spaces
think the Fed will change its accommodative stance in the near term. However,
investors should prepare portfolios for relatively high inflation in the long term Fixed income
by staying underweight but flexible on duration, and selectively benefitting Play the recovery, play credit and inflation p. 6
from the rotation favouring Value and Cyclical stocks. In addition, investors
The Fed is unlikely to engage in a taper tantrum to ensure easy financial
should consider increasing their allocations to assets such as inflation-linked
conditions, but the era of low inflation and low rates may not return as we
bonds and real assets. Overall, it is important to look at relative value ‘within’
are at the start of a ‘regime shift’.
and ‘across’ asset classes, including credit.
Macro Equity
A cocktail of rotation, selection
Value vs. growth: how to benefit from the rotation p. 4
and earnings growth p. 7
The value vs. growth rotation is a long-term trend, which will be supported
Despite vaccination delays in Europe, we believe demand and earnings will
by economic reopening but it will not follow a linear, straight path, thereby
surprise on the upside this year. but investors should not lose focus on the
justifying the need to stay active.
fundamentals
Thematic Global views
You asked, we answered p. 8
Our Global Views team attempts to answer some of the questions often asked by our clients
This Month’s Topic
Fixed-income markets: from cyclical to structural challenges p. 12
Since the start of the year, bond yields have surged in the economies of the G10 as markets anticipate a sharp acceleration in inflation and economic
activity. This rebound is likely to be particularly strong in the US given its enormous fiscal stimulus plan. In the medium term, opinion is divided
concerning the post-Covid crisis macroeconomic trajectory and a possible change in the inflation regime in the US.
Thematic
Speculative grade default cycle: an earlier peak and an expected benign trend p. 15
Extraordinary policy intervention has made this HY default cycle unusually short-lived, helping to limit quite significantly the rise in defaults among
mid- and high-rated speculative grade companies. A turn into a more benign falling trend over the next quarters looks likely, in light of improved macro
perspectives, expected progress in vaccinations and encouraging signals from financial drivers.
Thematic
Next step for the Biden administration: the infrastructure package p. 18
While the Biden administration has just successfully passed a $1900 bn stimulus package, attention will now turn to the infrastructure package that was
included in Biden’s campaign promises.
Market scenarios & risks Macroeconomic picture
> Central & alternative scenarios p. 20 > Developed countries p. 25
> Top risks p. 21 Macroeconomic outlook - Market forecasts
> Cross asset dispatch: > Emerging countries p. 26
Detecting markets turning points p. 22 Macroeconomic outlook - Market forecasts
> Global research clips p. 23 > M acro and market forecasts p. 27
> A mundi asset class views p. 24 > D isclaimer to our forecasts / Methodology p. 28
> P ublications highlights p. 29
2- Document for the exclusive attention of professional clients, investment services providers and any other professional of the financial industryCROSS ASSET #04
INVESTMENT STRATEGY
CIO VIEWS Bubbles, tantrums and the revenge of value
A big shake-up is under way in bonds – rising UST yields, a steepening yield curve
(2-10Y) and inflation expectations are leading markets to question whether we are facing
a taper tantrum 2.0. We think that the risk of the Fed taking pre-emptive measures
to stop its buying programme in the next 12 months has been exaggerated. The Fed
will remain cautious and downplay inflation risks. Therefore, we could see a healthy
increase in yields, driven by expectations of a recovery. US inflation now seems to be
having a technical rebound, driven by base effects and ISM input prices, but viewing
this as only a short term pattern could be a mistake. Once these so-called base effects
fade, markets will realise there is something more structural to inflation. The era of low
growth, low inflation and zero rates forever is coming under attack, with a new narrative
emerging: inflation is returning. On the other hand, CBs and governments need money
Pascal BLANQUÉ,
to help challenged businesses survive, create new jobs and finance projects to address
Group Chief Investment Officer
inequalities and climate issues. Fighting inflation is not the top priority, with the focus
on full employment.
With CBs unable to withdraw support measures, we are progressively moving towards
a new regime, one we call the road back to the 70s. A change of regime often occurs
with a change in the mandate of CBs as in the late 70s. However, markets are expecting
that CBs will be able to control the yield curve FOREVER. This is wrong as new priorities
may force CBs to move into uncharted waters. The second phase of this sequence should
be less benign for bond yields and lead to a rebalancing of risk premia. Keeping these
backdrops in mind, there are some key questions investors should address:
• How to manage bond allocation with rising yields? The rise might not be over yet,
but the path of acceleration should slow. Looking at the 2013 taper tantrum, more than
Vincent MORTIER, two-thirds of the bond correction happened in the first three months. That situation
Deputy Group Chief Investment appears to be repeating itself in early 2021. Bonds move ahead of a confirmation of
Officer change, and that confirmation should occur in the summer. Investors should stay
underweight duration, retaining the flexibility to readjust at higher rates. Opportunities
are available to extract value in credit, relative value across regions, and across yield
curves. This favours a flexible and unconstrained approach in fixed income investing.
• Will higher bond yields trigger a bubble burst in equities? Higher UST yields are
important to watch for bonds as well as equities. The gap between the US dividend
yield and long-term rates is zero, a sign that a repricing in equities was expected.
There is also an element of irrationality in the strong equity performance in the first
weeks of 2021. What we see now is a clean-up of some excesses, but certainly not a
bear market. The equities outlook remains constructive, but returns are becoming less
interest rate-driven and more real economy-driven. For investors, equities remain a
key asset class in a recovery phase, but they should avoid expensive areas vulnerable
to higher yields.
• Will value’s revenge last? The yield repricing is driving a rebalancing towards value.
The first leg of this rotation occurred in November 2020, triggered by an acceleration
Overall risk sentiment in the vaccine situation. Now we are seeing a second leg, driven by rising rates. We
will have to wait and see how this situation unfolds as inflation and the economic
Risk off Risk on acceleration are confirmed. Investors may seek further opportunities in value, with a
cyclical tilt, to benefit from the multi-year rotation.
• With rising yields, is the EM case still valid? EM assets are sensitive to USD and US
rates but EM are now in much better shape than in 2013 with regard to inflation and
current account imbalances, especially the ‘Fragile Five’. EM bonds could play a key
Constructive on risk assets, role as income engines in global portfolios. We remain constructive in the medium to
preference for equities over credit, long term on EM HC debt, but we remain defensive in the short term. The same applies
relative value. The speed of change to FX, which has the potential to outperform the USD on a bearish USD medium-
of UST yields, real rates to be term view but the short-term outlook is less benign, as the USD may strengthen. EM
monitored equities are the favoured EM asset – exposure to growth at decent prices and a positive
Changes vs. previous month earnings outlook.
Cautious, active on duration; • Higher inflation challenges traditional diversification, as correlations between
positive on inflation in the US equity and bonds turn positive. Investors should consider increasing their allocations
Defensive on EM debt and FX to assets such as inflation-linked bonds, real assets (real estate and infrastructure) and
near term, given rising US rates commodities.
and USD strength
To conclude, in a world of stretched absolute equity and bond valuations, relative
Overall risk sentiment is a qualitative value is the only value left in markets. Investors should look at relative value ‘within’
view of the overall risk assessment
of the most recent global investment
and ‘across’ asset classes. In this respect, absolute return approaches that seek to extract
committee. relative value in markets, with limited directional risk, could help enhance diversification.
Document for the exclusive attention of professional clients, investment services providers and any other professional of the financial industry -3CROSS ASSET #04
INVESTMENT STRATEGY
MACRO Value vs. growth:
how to benefit from the rotation
Joe Biden’s stimulus package of $1.9tr has according to IBES). Finally, the historical
caused an acceleration of the increase in valuation gap between the two indices,
long-term rates and thus strengthened which is higher than it was in 2000,
the value theme (MSCI World Value +4.7% suggests that the trend may continue.
since the start of the year, compared to Having said that, we believe it will be
-2.5% for the MSCI World Growth on 15 necessary to progressively favour an
March). The mechanism is well known: active approach to take full advantage
the increase in rates accompanies the of the great value rotation.
economic recovery, which is favourable
There are very long-term arguments in
to cyclical stocks and its corollaries, small
support of value: its high discount, a
stocks and the majority of value stocks.
Monica DEFEND, future acceleration of inflation, the return
Conversely, it weighs on stocks with a
Global Head of Research to more growth (productivity gains and
longer duration (growth), through the
decarbonisation investments, a less
discounting of future, long-term profits.
unfavourable demographic factor in a few
We believe that this rotation has the years’ time, etc.). Nevertheless, the path
potential to go further. is likely to be chaotic. In this respect, we
A new investment cycle started at the note that when the MSCI World Growth/
low point of the equity markets on 23 Value ratio falls below its 24-month
March 2020. This first, pro-cyclical average, it tends to bounce back towards
phase was accompanied by a rebound it (see chart), sometimes even violently.
in commodities, which usually lasts at Breaking an established order can take
least two years, and by rising inflation time. If we believe there is still about 10%
expectations that support the idea that to go until the ratio reaches its average —
nominal economic growth will recover. As that appears quite comfortable — we may
Éric MIJOT usual, small caps were the first to benefit. come to a tipping point a little later that
Head of Developed Markets underpins the need for active management
However, value stocks, found primarily
Strategy Research in the financial and energy sectors, with to get past that point safely.
well-known structural challenges (digital There are a few elements that support
transformation, regulation, low interest this view: 1) at about 2% on US 10-year
rate regime for the first, ecological yields, taking up duration could become
transition for the second) lagged. tempting; 2) if inflation rises, the pricing
The acceleration of the rise in long-term power theme, which is favourable to
interest rates, this time via real interest certain growth stocks (luxury, some Big
rates, which weigh on risk premiums and Tech, etc.), could come back into fashion;
therefore on the discount rate, has more and 3) long-term themes (green plans,
recently favoured this shift from growth digital, ESG) could benefit from interesting
stocks to value stocks. As their profits have entry points. In conclusion, we believe
been severely tested during the recession, that the value style could go further in
the latter will also generate higher profit this cycle and that it will be necessary
growth than growth stocks over the next to progressively focus on relative value,
MSCI World Growth/MSCI World Value ratio
which plays into the strengths of active
12 months (+34% for the MSCI World Value
The value vs. growth against +24% for the MSCI World Growth, management.
rotation is supported
by the economic MSCI World Growth/MSCI World Value ratio
1.5
reopening. Some long
1.4
term arguments also 1.3
play in favour, but it 1.2
will not follow a linear, 1.1
1
straight path, thereby
Ratio
0.9
justifying the need to 0.8
stay active 0.7
0.6
0.5
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
US Recession (NBER) MSCI WORLD Growth/Value Rolling 24 Months Average
Source: Amundi Research, Refinitiv, as of 15 March 2021.
4- Document for the exclusive attention of professional clients, investment services providers and any other professional of the financial industry
10Y breakeven inflation ratesCROSS ASSET #04
INVESTMENT STRATEGY
MULTI-ASSET Recalibrate risks within the “pro-cyclical”
paradigm
The economic environment is supportive higher pace than during the first months of
of risk assets and we continue to play this year.” We remain overall constructive
on reflation but are aware of consensus on credit but have slightly downgraded IG
risks, the growth divergences within DM and recommend investors look for better
and between DM and EM, and some high entry points given that the potential for
valuations. The recent pullback in equities in further spread compression looks limited
certain areas and the increase in bond yields compared with HY, which still offers some
has been more of a recalibration of multiples, space for spread tightening, and attractive
but it is not a structural de-risking and may carry. Even though IG remains resilient
provide attractive entry points for active against market volatility amid the ECB’s
investors. Thus, staying agile and selective is support, rising bond yields could affect
Matteo GERMANO,
important as there are opportunities across flows into the asset class. Moreover, we
Head of Multi-Asset
the spectrum in equities, credit and FX in believe the relationship between rising
developed and emerging markets, though yields and IG spread tightening — an
investors should adjust their positions due improving economy causes bond yields
to the headwinds from rising US rates. to rise and corporate credit metrics to
improve — could weaken.
High conviction ideas EM debt is a way to prop-up ‘smart income’
With an overall constructive view on over the long term but we realise that EMBI
equities, we remain neutral on Europe spreads are close to fair value, with some
and the US and positive on Japan and tightening potential in HY, whereas valuations
Australia. In the first, we have upgraded are expensive in IG. As a result, we have
UK domestic stocks owing to their exposure marginally downgraded EMBI due to rising
to the reflation theme on the back of US rates and accelerating outflows from HC
the vaccination programme, a demand debt. Nonetheless, we suggest adjusting
With growth resurgence and improving earnings. Their USD hedges and protecting US duration
narratives confirming asymmetrical profile and the large weight of exposure amid higher US growth and
defensives offer a cushion against what has inflation dynamics. On FX, investors should
our moderate risk- become a consensual recovery trade. In EM, remain constructive – stay positive on BRL
on stance, we see we remain optimistic but recommend some and RUB but now through the JPY and EUR
adjustments in China to emphasise more the respectively, in light of the strengthening
opportunities in value strategy and financial names amid the dollar. We are now cautious on MXP/USD,
DM equities and a country’s improving economic environment. KRW/USD and CNY/USD (limited upside).
On duration, we remain neutral on the US While the KRW was downgraded due to
realignment in the and Europe, but are positive on US inflation. concerns over outflows, the RUB remains
EM FI and FX spaces Despite the recovery in valuations, potential supported by growth, inflation expectations
targets point to a further appreciation of in Russia and the strong oil price. On DM,
inflation expectations from current levels. we keep our positive view on CAD/USD and
Even in the UK, the latest consumer price NOK/EUR, as well as our cautious stance on
report and an expansionary fiscal policy CHF/GBP and CHF/CAD.
paints an optimistic picture for inflation,
Risks and hedging
leading us to stay positive on our 2-10Y
yield curve steepening strategy. On Inflation and UST yield movements are
peripherals, we are constructive on the key risks that may alter the attraction of
30Y Italy vs. Germany spread owing to equities vs. bonds. We advise investors to
supportive technicals and valuations, as maintain hedges in the form of derivatives
well as positive political developments. We to safeguard equities exposure, credit
expect ECB support to continue for Euro positions and US duration. We have
markets as President Lagarde clarified that downgraded gold owing to rising real rates
bond buying will happen at a “significantly and growth expectations.
Amundi Cross Asset Convictions
1 month change --- -- - 0 + ++ +++
Equities
Credit
Duration
Oil
Gold
Source: Amundi. The table represents a cross-asset assessment on a three- to six-month horizon based on views expressed at the most recent global investment committee. The outlook, changes in outlook and opinions on the asset class
assessment reflect the expected direction (+/-) and the strength of the conviction (+/++/+++).
This assessment is subject to change. UST = US Treasury, DM = developed markets, EM/GEM = emerging markets, FX = foreign exchange, FI = fixed income, IG = investment grade, HY = high yield, CBs = central banks, BTP = Italian government
bonds, EMBI = EM Bonds Index.
Document for the exclusive attention of professional clients, investment services providers and any other professional of the financial industry -5CROSS ASSET #04
INVESTMENT STRATEGY
FIXED INCOME Play the recovery, play credit and inflation
The ongoing recovery allows us to maintain US fixed income
our positive view on risk assets, but this
Fiscal stimulus and infrastructure spending
recovery is likely to be characterised by
are likely to raise growth projections and,
divergences in growth rates, with the US-
accordingly, we remain defensive on USTs
EU gap widening. This has caused inflation
(steepening yield curve, increased debt).
expectations and 10Y yields to rise. Going
Investors may look to reduce interest
forward, markets are expecting that once
rate duration exposure with the option to
the impact of the current ‘base effects’ on
tactically add if valuations look appealing.
inflation subside, yields and inflation will
However, TIPS are an attractive diversifier.
return to low levels. However, we believe
something more structural is happening with A strong consumer should boost pent-up
Éric BRARD, demand in H2 and is already supporting
inflation in long run. Given this backdrop,
Head of Fixed Income the housing market, even as labour data is
investors should remain active on rates
and USD movements and their effects on EM improving. We remain positive on housing,
assets. Credit remains a source of income, agency mortgages and securitised credit, but
amid hopes of improving metrics and CB in the last one the volatility is high, so some
support, but selectivity is crucial. prudence is essential, especially at the top
of the stack where valuations are expensive.
MSCI
Global and European fixed income World Growth/MSCI World
Importantly, higher Value
rates are ratio
driving consumer
expectations for duration extension, which
We remain cautious on duration across could be a risk for investors. Thus, the need
the board, particularly in the US, core for monitoring and selection is high. We are
Europe, Canada and the UK. On peripheral constructive on corporate credit, but think
debt, we keep our positive stance, mainly investors should limit IG duration to reduce
Yerlan SYZDYKOV, through
1.5 Italy 30Y, but recommend investors
portfolios’ sensitivity to higher rates.
Global Head of Emerging Markets explore
1.4 opportunities across the entire
curve. We are also actively following US and EM bonds
1.3
Euro yield curves, as the former continues
1.2
to steepen on high inflation, which may be The higher rates prospects in the US are
1.1
hedged through breakevens. The latter weighing on EM in the near term. On HY, we
presents
1 opportunities to lock in some gains
are more defensive now as we believe spreads
Ratio
but 0.9
investors should stay overall positive may widen from current levels. LC debt also
on 10Y and 30Y US, and neutral on Europe. appears vulnerable at this stage, considering
0.8 the FX risks. From a regional view, we are
We now believe the 10Y Australia breakeven
0.7
presents value amid the improving economy selective and active in frontier markets, and
and 0.6
inflation expectations there. We are recommend investors cautiously increase
optimistic
0.5 on credit due to fundamentals exposure to oil exporters (rising prices,
Kenneth J. TAUBES, 1975
and forecasts 1980
of low 1985default 1990 rates, but 1995 supply
2000 concerns,
2005 demand
2010 recovery).
2015 2020
the impact of rising real yields must be
CIO of US Investment
monitored. We US Recession
favour (NBER)
shorter duration MSCI WORLDFXGrowth/Value Rolling 24 Months Average
Management
debtSource:
(3-7Y) over longer maturities
Amundi Research, Refinitiv, as of 15 March 2021.
We have upgraded USD, with a near-term
(more sensitive to rate movements). Our view, due to strong US growth projections. The
preference is for financials – subordinated rate differential in favour of the US vs. Europe
debt vs. senior, HY vs. IG. explains our defensive stance on the Euro.
10Y breakeven inflation rates
10Y breakeven inflation rates
The Fed is unlikely
2.5
to engage in a taper
2.0
tantrum to ensure easy
financial conditions, but 1.5
the era of low inflation
%
1.0
and low rates may not 0.5
return as we are at the 0.0
start of a ‘regime shift’ -0.5
2014 2015 2016 2017 2018 2019 2020 2021
United States Germany Japan
Source: Amundi, Bloomberg, as of 18 March 2021.
GFI= Global Fixed Income, GEMs/EM FX = Global emerging markets foreign exchange, HY = High yield, IG = Investment grade, EUR = Euro, UST = US Treasuries, RMBS
= Residential mortgage-backed securities, ABS = Asset-backed securities, HC = Hard currency, LC = Local currency, CRE = Commercial real estate, CEE = Central and
Eastern Europe, JBGs = Japanese government bonds, EZ = Eurozone. BoP = Balance of Payments.
6- Document for the exclusive attention of professional clients, investment services providers and any other professional of the financial industry
Rebound in manufacturing could support cyclical stocks in EuropeCROSS ASSET #04
INVESTMENT STRATEGY
EQUITY A cocktail of rotation, selection
MSCI World Growth/MSCI World Value ratio
and earnings growth
Overall assessment US equities
A key1.5 topic for investors is whether Pent-up consumer demand and supportive
companies will be able to pass on the policies allow us to remain constructive,
1.4
increase in input prices and rising supply especially on the high-quality cyclical value
costs1.3to consumers. If that happens, and segments, as they could benefit from a wide
1.2
we think it could, earnings growth should valuation gap with growth and a steepening
improve,
1.1 driving rotation opportunities of the yield curve. However, we may see
and equity
1
performance going forward. some overheating of the economy amid
Ratio
Nonetheless, the recent volatility is an apt supply bottlenecks and as Biden’s stimulus
0.9
reminder that this recovery will be uneven seeps through. In addition, some caution is
Kasper ELMGREEN, and 0.8
non-linear across sectors and regions. required on account of the expensive corners
Head of Equities It also
0.7 serves as a way of clearing excess of the markets such as high-growth and
froth0.6in overexuberant segments of the momentum. Hence, we are selective and see
market. Therefore, investors should focus more of a rotation rather than a correction.
0.5
on fundamentals, the inherent strengths Secondly, high-quality cyclicals, value and
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
of business models and balance sheets. reasonably-priced growth stocks should
US Recession (NBER) MSCI WORLDbenefit from earnings
Growth/Value improvements,
Rolling 24 Months Averagein line
European equities with the economy. At a sector level, there are
The Source:
‘greatAmundi Research, Refinitiv, as of 15 March 2021. opportunities in financials, energy and even
rotation’, favouring cyclicals
vs. defensives and value vs. growth, is consumer names directly impaired by the
demonstrating resilience. But the focus Covid-19 crisis. Based on a global recovery
now will be on economic reopening, and higher rates, companies in these sectors,
interest rates and nervousness 10Y breakeven
around inflation
especially rates
those with sustainable business
Yerlan SYZDYKOV, overvalued hyper growth stocks. As a models and where the recovery is not yet fully
Global Head of Emerging Markets result,
2.5 we continue to look for businesses priced in, should now do well. Longer term,
with strong balance sheets. We also believe we see some risks that could be handled by
2.0
investors should explore quality cyclical staying active. These include the fiscal stimulus
stocks in financials and materials. On the being too large and the Fed potentially being
1.5 forced to change its dovish stance sooner.
former, banks represent a sector where
the 1.0
recovery is not yet fully priced in, but
%
selectivity is key. At the other end, investors EM equities
0.5 look for attractive defensive stocks
should We maintain a constructive view in light of
in telecoms and consumer staples, which is improving EM and global growth prospects,
0.0
anti-consensual and presents opportunities but acknowledge the higher US rates.
given the relatively attractive valuations. While we are positive on tech and internet,
-0.5
Remaining
2014 valuation-conscious
2015 2016 is important 2017 we2018
think valuations
2019 in some
2020 areas are
2021 high.
Kenneth J. TAUBES, due to the abundant liquidity that is finding On the other hand, we remain cautious in
United States Germany Japan
CIO of US Investment its way through to different assets. Finally, consumer staples and healthcare, but have
Source: Amundi, Bloomberg, as of 18 March 2021.
Management amid the risks of rising rates – being slightly upgraded our view of the latter.
monitored closely – unexpected tapering, Our focus remains on stock selection as
ineffective vaccines against variants and/ we continue to explore value names with
or delays in inoculation programmes remain cyclical growth and quality characteristics.
key. Any volatility among high-quality As a result, we believe select financials
names may be an opportunity. names in Taiwan look attractive.
Rebound in manufacturing could support cyclical stocks in Europe
Despite vaccination Rebound in manufacturing could support cyclical stocks in Europe
delays in Europe, we 1.1 65
believe demand and 60
1.0
earnings will surprise 55
50
on the upside this year.
PMI level
0.9
45
but investors should
Ratio
0.8 40
not lose focus on the
35
fundamentals 0.7 30
Cyclicals/defensive ratio Eurozone manufacturing PMI, RHS
Source: Amundi, Bloomberg, data as of 17 March 2021. Stoxx Europe 600 Optimised Cyclical and Defensive Price indices
Document for the exclusive attention of professional clients, investment services providers and any other professional of the financial industry -7CROSS ASSET #04
INVESTMENT STRATEGY
THEMATIC You asked, we answered
GLOBAL VIEWS Our Global Views team attempts to answer some of the questions often
asked by our clients
What are the next steps for the NGEU? 27 members have ratified the NGEU, with
The Next Generation EU fund was agreed those 11 roughly divided between northern
in July 2020 after weeks of acrimonious and southern states. The slow process is
negotiations between EU member states due to national parliamentary agendas and
which pitted the “frugal four” against legal constraints, although so far it remains
the rest of the union. The €750bn plan, in line with EU budget timeline.
comprising €390bn in grants and €360bn The European Commission (EC) is
in loans to member states, is actually expecting to launch the fund and provide
built around a newly created €672.5bn initial financing over the summer.
instrument known as the Recovery and However, the German ratification has been
Didier BOROWSKI, Resilience Facility (RRF), which was fully jeopardised by the Constitutional Court
Head of Global Views adopted by the European Council on 11 ruling on 26 March. The bill was passed by
February 2021. both the Bundestag and Bundesrat, and was
EU countries have until 30 April 2021 about to be signed by President Steinmeier,
to submit their national recovery and but an appeal was made by a group of
resilience plans. They also need to set Eurosceptics. The Karlsruhe judges need to
out their reform and investment agendas decide whether the “new own resources”
for the next five years. This can be an i.e. taxes the Commission will create to
issue for countries, which are struggling to finance the NGEU, are aligned with EU
implement structural reforms and/or have
Treaties. The plaintiffs are not opposing the
upcoming elections, as is the case in France
recovery fund per se but the fact that the
and Italy. Then, the EC will have up to two
new resources and debt issued are de facto
months to assess each plan, following which
leading to a fiscal union which violates the
Pierre BLANCHET, the Council will have four weeks to approve
them. Grants and loans are given according German constitution.
Head of Investment Intelligence
to achievements and agreed milestones. The plan has strong political backing in
Assuming that the ratification process is Berlin and should eventually be approved.
completed by 1 May, member states should Yet, the EC cannot raise money for the
receive the first funding by 1 August. fund before all countries have ratified
70% of the RFF’s grants (€312.5bn) will be the NGEU, and therefore distribute 13% of
committed in 2021 and 2022, based on the the total amount in H2 2021 as planned.
unemployment rate in 2015-2019, inverse European economies need that funding
GDP per capita and population share. The as business activities are suffering from
remaining 30% will be fully committed by lockdown measures and low vaccination
the end of 2023, based on the same criteria rates. We believe the pressure on politicians
plus the drop in real GDP. and judges will be significant enough over
Tristan PERRIER, Several member states have started the the coming weeks for the NGEU approval
Global Views ratification process ahead of the Council process to go through, and the first projects
decision. At the time of writing,NGEU
11 outgrants
of toand loans by September.
be funded
1/ N GEU grants and loans
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Croatia
Poland
Romania
Netherlands
Lithuania
Slovenia
Czech Rep.
Hungary
Latvia
Estonia
Austria
Cyprus
Denmark
France
Ireland
Malta
Finland
Greece
Italy
Germany
Spain
Portugal
Slovakia
Belgium
Luxembourg
Bulgaria
Sweden
Grants as % of 2019 GDP Loans as % of 2019 GDP
Source: Bruegel Institute estimates, Amundi Research - Data as of March 2021
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INVESTMENT STRATEGY
Key agenda this year while US economic activity will continue
THEMATIC • 30 th April : member states need to submit to expand at a brisk pace. It is therefore
GLOBAL VIEWS their national recovery and resilience clear that the US is doing better than the
plans setting out their reform and eurozone from an economic standpoint.
investment agendas until 2026 In recent months, the consensus has been
• End June: The Commission will have up to continuously revised upwards in the US and
two months to assess the plan downwards in the eurozone. As a result, it
• 1 st August: the Council has four weeks to is now estimated that real GDP will return
adopt its decision on the final approval of to its pre-crisis level by this summer in the
each plan and send the funds to member US, but not before the end of 2022 or even
states (first 13%) the beginning of 2023 in the eurozone. This
means that there is a 12- to 18-month cycle
Toward the creation of bad banks in gap between the US and the eurozone.
Europe? The consequences for US interest rates
are important. Firstly, because it reinforces
Given the public support measures,
the idea that inflation will materialise in the
the Covid-19 crisis has not resulted in a
US first. However, in the wake of its strategy
significant increase in outstanding Non-
review adopted last year (the objective is
Performing Loans (NPLs). European banks
now to raise inflation to an average of 2%
are well capitalised and there is no need to
over a cycle), the Federal Reserve (Fed) has
worry if an economic rebound materialises
time before it will need to hike rates, even if
this year. It is worth remembering that it
inflation surprises on the upside. We do not
took until 2019 for European banks to return
expect the first rate hike before 2023.
to their pre-2008 crisis NPL levels. The total
amount of NPLs carried by European banks The USD 1.9 trillion (9% of GDP) fiscal
is currently around €600bn (the average stimulus package adopted by Congress
NPL ratio, at 2.8% in Q3 2020, is low but will likely trigger a mini boom in 2H
there are significant differences between 2021. Even more so as a plan for some
countries). Looking ahead, banks may USD 2 trillion in infrastructure investment
need direct public support to ensure that is likely to follow by year end. The Fed
increased NPLs do not limit bank-lending has committed to keeping its key rates
Towards a mini boom volumes. unchanged in the short term, but not
long-term interest rates. Its purchases of
in the US in 2H21 The good news is that the European
Treasuries (currently USD 80bn per month)
authorities have a clear strategy to
have not been enough to prevent the rise
remove NPLs from bank balance sheets
in long-term bond yields (1.7% for the ten-
in order to preserve the distribution
year), driven by both real interest rates and
of credit and protect banks from a
inflation expectations. For the time being,
deteriorating economic situation. The
there is no question of the Fed tapering
European Commission and the ECB have
its asset purchases, but eventually it will
finally converged. The creation of a single
have to reduce its degree of monetary
European “bad bank” was initially preferred
accommodation as the output gap closes.
by the ECB but this is not the solution that
This decision would inevitably push US
is now envisaged. Indeed, the European
long-term interest rates higher.
Commission supports the creation of
national “bad banks” that would instead In contrast, the ECB will oppose a
be called Asset Management Companies movement on long-term interest rates
(AMCs) to facilitate the management should it be disconnected from eurozone
of NPLs. This network of AMCs would fundamentals. The economy is too fragile,
securitise and sell NPLs to final investors. credit conditions need to remain easy,
This is a key milestone that should and some ECB members thus believe that
increase the eurozone’s resilience to further steepening of the yield curve would
external shocks. be premature. Inflation is still far from
threatening the area and the fragmentation
What are the impacts of the US vs. between core and periphery is still too
eurozone growth differential? large. It is therefore too early for the ECB to
reduce the size of its APP.
One year after the start of the crisis,
we can assessment of the impact of the The rise in US yields will be capped. In an
Covid-19 crisis. As far as the victims are environment of low interest rates, the rise in
concerned, the US has suffered a greater long-term rates in the US would eventually
disaster than the eurozone (543,000 deaths lead to a renewed appetite for US Treasuries
vs. 445,000) despite having a slightly from both domestic and foreign investors
smaller population (330 vs. 342 million). searching for yield. This would limit the rise
This is due to the less restrictive measures in US long-term interest rates and may as
imposed in the US. As a result, real GDP a result temporarily strengthen the dollar
fell less in the US than in the eurozone last against the euro.
year (-3.5% vs. -6.8%). Given the new set of However, the cycle gap will not
restrictive measures put in place in Europe, continuously widen in favour of the
GDP growth may remain sluggish in Q2, US over the next 12 months, quite the
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INVESTMENT STRATEGY
contrary. On the one hand, growth in the will be used is highly contingent on future
THEMATIC eurozone is expected to accelerate strongly Covid developments.
GLOBAL VIEWS in the coming quarters, while on the other, Recovery stimulus pursues a different
overheating in the US could lead to a logic. It can only be fully deployed once
boom/bust cycle, with growth falling back the economy re-opens, with plans mostly
abruptly in 2022-23 as the effects of the (although not entirely) focusing on
fiscal stimulus fade away. investment rather than income support to
The European equity markets could households and life support to corporations.
benefit both from a positive trend in profits In this respect, the Next Generation EU
on the back of the recovery of the global (NGEU) recovery fund, that will be available
cycle and prolonged accommodative from H2 2021 on, will be an essential tool,
monetary conditions should support supplemented by efforts at the national
valuations. The overrepresentation of level in the countries that have the capacity
technology stocks on the American to do so. As the crisis has lasted longer than
market, which are sensitive to the rise in initially forecast, the residual damage that
long rates, is causing a rotation in favour will need to be repaired after closed sectors
of cyclical and financial sectors which are are allowed to reopen will also be greater.
more represented in European indices. This The case for a larger stimulus is therefore
configuration of desynchronised growth likely to build. While it may be politically
should paradoxically benefit European difficult to extend the NGEU (which was
markets, which offer a more limited risk of only agreed after tense negotiations in
loss on sovereign and corporate bonds and July 2020), greater efforts can probably
a more attractive equity risk premium. be made at the national level, thanks to a
prolonged waiver of EU budget rules. Note
The case for a larger Should we expect further stimulus that prominent decision-makers (President
stimulus in Europe in Europe? Macron of France and ECB Board Member
The short answer is yes, both regarding Isabel Schnabel) have recently called for
is likely to build more European-level fiscal stimulus.
fiscal support during the crisis and
recovery stimulus after the crisis.
What is America’s new geopolitical
Regarding short-term fiscal support, agenda?
the slow start to the European vaccination
campaign means that the reopening Anthony Blinken’s very first foreign policy
of closed sectors seems, as of today, a speech was quite insightful. The new
more distant prospect than in the US or administration aims to tackle the climate
UK. Governments will therefore need to crisis and drive a green energy revolution,
continue the same kind of support measures secure US leadership in technology, and last
that have been used extensively since the but not least manage its relationship with
beginning of the crisis (mostly support for China, a relationship that has been called
short-time work schemes, specific aid for “the biggest geopolitical test of the 21st
hard-hit sectors and public guarantees century”.
on corporate debt), at a higher fiscal cost Trump’s unilateralism is certainly over,
than forecast at the end of 2020. Germany, and Biden’s United States is based on a
in particular, announced in March a debt- foundation of values and objectives shared
financed supplementary budget of €60bn with Europe (building a more inclusive
that could increase its net borrowing to a economy, fighting global warming,
record high of €240bn in 2021 (7% of GDP), consolidating Path to recovery
democracies, postracism
fighting Covid‐19
although whether all this extra capacity and inequality, etc.). But the multilateralism
2/ P ath to recovery post Covid-19
130 130
120 120
China
Q4 2019 = 100
110 USA 110
100 100
Euro-area
90 90
80 80
United States China Eurozone
Source: Amundi Research - Data as of 31 March 2021
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INVESTMENT STRATEGY
advocated by Blinken is quite different from therefore calls for a rapid fiscal effort of
THEMATIC what Europeans have in mind. It is striking several hundred billion dollars to safeguard
GLOBAL VIEWS to observe that the European Union (EU) national security and US supremacy, without
as a political entity is not mentioned once worrying about the resulting deficits.
in this speech, while China is mentioned 17 For example, in the context of a global
times. And if Europe is mentioned at all, it semiconductor shortage, the report calls
is only once, and only in the same breath for the US to stay “two generations ahead”
as the other continents, as the US wants of China in semiconductor manufacturing
to reinvent partnerships with its old allies and suggests significant tax credits.
(“countries in Europe and Asia”), as well as Ursula von der Leyen’s EU is certainly not
with its new partners “in Africa, the Middle to be outdone, claiming that Europeans
East and Latin America”. are ready to assume and strengthen their
This obsession with China’s rise corresponds power. The EU has just announced that
to a tangible reality. It is estimated that it wants to double its semiconductor
China’s real GDP will double by 2035, which production by 2030 to 20% of world
China real GDP per roughly corresponds to a doubling of GDP production. The concepts of strategic
per capita within 15 years. China is making autonomy and European sovereignty are
capita will double no secret of its technology ambitions. The increasingly being put forward. However,
US is seeking to maintain its dominance. they are not precisely defined, and their use
by 2035 The EU is ultimately caught in a vice is still controversial. On the economic front,
between the US and China. the NGEU recovery fund adopted last year
For Blinken, artificial intelligence and will certainly make it possible to deploy
quantum computing are the two pillars of investments in key areas. But any delay in
tomorrow’s technology. The technological the start-up of the fund would have serious
competition between the two blocs has consequences.
only just begun. It is no coincidence that this A tactical alliance between China and
speech comes two days after the publication Russia on the one hand, and the US and
of the National Security Commission’s report Europe on the other, seems to be emerging,
on artificial intelligence 1 . This report clearly particularly with regard to democracy
aims to establish the way to maintain US and human rights. But when it comes
leadership. It states that the US could lose to economics, all blocs have divergent
its technological and military superiority interests and will compete.
to China over the next decade, something
not seen since the end of WWII. The report Finalised on 31 March 2021
1
See www.nscai.gov
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INVESTMENT STRATEGY
THIS MONTH’S TOPIC Fixed-income markets:
from cyclical to structural challenges
Since the start of the year, bond yields have surged in the economies of the
G10 as markets anticipate a sharp acceleration in inflation and economic
activity. This rebound is likely to be particularly strong in the US given
its enormous fiscal stimulus plan. In the medium term, opinion is divided
concerning the post-Covid crisis macroeconomic trajectory and a possible
change in the inflation regime in the US.
During the last quarter, US 10-year yields pre-emptively based on forecasts but would
reached the milestone rate of 1.6%, dragging rather wait to see actual data, and that it
in their wake German 10-year rates, which would take people time to adjust to that new
rose by 22bp to -0.35%. These figures practice. J. Powell therefore kept a prudent
Valentine AINOUZ, reflect greater investor confidence in the tone and recommended patience concerning
Deputy Head of Developed growth outlook for the US economy. Given any change in monetary policy. He said
Markets Strategy Research the extent of the fiscal stimulus programme, it would take some time for substantial
we now expect growth in the US to reach progress to be seen and that it would also
nearly 8% in 2021 and 4% in 2022, with take some time for unemployment to go
inflationary pressure remaining contained. down. Nevertheless, a notable change was
The situation is different in the Eurozone, evident in the Fed Chairman’s discourse:
which should take longer to return to pre- J. Powell clarified that an increase in rates
Covid growth trends. Ultimately, the rise in would be possible under certain conditions:
bond yields does not put the same pressure (1) maximum employment, (2) inflation
on the Fed and the ECB. reaching and staying at 2%, and (3) inflation
increasing moderately above 2% for a certain
The Fed will support economic recovery length of time. This differs significantly from
in the US by tolerating higher inflation the previous message that they envisaged
Delphine GEORGES, The members of the Fed were not no rate hike.
Senior Fixed Income Research unduly concerned about the recent rise The FOMC expects no fed funds rate hike
Strategist in yields. Long-term real yields, which before 2024 (median projections) despite
were at excessively depressed levels the upward revision to economic growth,
at the end of the year have returned to employment and inflation projections.
more normal levels, while the long-term Unemployment and the core PCE are
inflation breakevens are approaching levels expected at 3.5% and 2.1% respectively in
more consistent with a Fed successful in 2023. The members of the FOMC stressed
achieving its symmetric 2% inflation target. that uncertainty was still very high around
In J. Powell’s latest speech, he gave no the virus but also highlighted the nature of
indication that the Fed would seek to contain the recovery and the extent of fiscal support.
this recent rise in yields. On the contrary, The Fed does not fear an overheating:
the Fed embraced the notion of rising inflation should remain slightly above 2%
yields because of an improvement in the over the coming years (core PCE at 2.2%
growth outlook. Important point: financial in 2020, 2.0% in 2021 and 2.1% in 2022). In
conditions remain very accommodative. this context, only 7 of the 18 members of the
At the same time, the Fed will not act pre- FOMC expect a rate hike before 2024 (4 in
emptively: J. Powell said they would not act 2022 and 3 in 2023).
US 10Y
1/ T he upward move Treasury
in nominal Breakdown
yields has been driven recently
by an increase in real yields
2.5 1.5
The Fed is now officially
behind the curve 2.0 1.0
0.5
1.5
0.0
1.0
-0.5
0.5 -1.0
0.0 -1.5
01-18 04-18 07-18 10-18 01-19 04-19 07-19 10-19 01-20 04-20 07-20 10-20 01-21
10Y inflation breakeven 10Y real Rates
Source: Bloomberg, Amundi Research, Data as 22 March 2021
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INVESTMENT STRATEGY
The ECB is preoccupied by the recent in trying to avoid financial fragmentation.
THIS MONTH’S TOPIC rise in yields The ECB’s capacity to convince the market
through its communication and action of
The members of the Governing Council
its ability to control interest rates will be
remain prudent given the recent rise in
decisive for peripheral yields and credit
bond yields. The ECB has clearly stated
spreads. After the acceleration in the pace
a preference for keeping low levels of
of purchases under its emergency program,
nominal/ real yields and relatively flat
we expect the ECB to increase the size of
curves.
the programme.
• Christine Lagarde said that the ECB
was closely monitoring the evolution of The upward pressure on bond yields
longer-term yields. led by US treasuries remains therefore
a threat for the Eurozone. The ECB will
• Isabelle Schnabel added that “a too
have to manage the economic divergence
abrupt increase in real interest rates on
between the US and the Eurozone over
the back of improving global growth
the coming months. Moreover, If there is
prospects could jeopardise the economic
any change in the inflation regime in the
recovery”.
US, it would pose a real challenge for the
• Fabio Panetta pointed out that we are European Central Bank and the Eurozone
already witnessing unwelcome contagion economy.
from the rise in US yields which is
incompatible with the outlook and Will we emerge from the Covid
negative for the recovery. crisis with a fundamentally different
In fact, the European economy will take macroeconomic trajectory from that
longer than the US economy to return which we were in at the start of the
to its pre-Covid growth trends. The crisis?
economic gap between the United States
and the Eurozone is expected to widen: We do not think that the pent-up demand
(1) the United States entered the Covid from the pandemic and the $1.9tr
crisis with a much stronger economy (2) government stimulus will reverse the
the pandemic has more strongly affected forces that have driven interest rates
the euro zone (3) fiscal support is much down over the last decade. Moreover, US
stronger in the United States. reflation trade cannot go too far too fast.
High asset prices and high debt levels make
The Fed believed that Also, the Covid crisis has increased growth fragile. The recovery is conditional
economic fragmentation within the on stable asset prices (real estate,
a rise in inflation would Eurozone. Germany, Austria and the corporate debt, equity). There is much
Netherlands have seen a less severe
be neither particularly recession: more ambitious emergency and
more sensitivity to underlying movements
in rates.
large nor persistent recovery plan, reduction in restrictions and
less exposure to the tourism sector. Italy, However, a new trajectory of inflation is
Spain and France have been particularly possible because structural changes can
badly hit by the crisis. be put in place.
As long as economic fragmentation 1. The Fed is willing to let the economy
prevails in the Eurozone, the ECB must run hot. The section of the economy not
maintain a stable cost of financing of directly affected by Covid performed
public debt. Fiscal policy can only be well during the crisis. Thanks to the Fed,
effective if sovereign yields remain low and the cost of corporate debt has fallen
stable even in the face of growing deficits. massively. Well-capitalised companies
In the absence of a significant rise in benefit from an incredibly low level of
interest rates for their development:
FIB ‐ Small Business Problems (the percent of firms finding them “critical” issues
growth expectations, the ECB stands alone
2/ D ifficulties in finding qualified workers is not far from pre-crisis levels
35
30
25
20
%
15
10
5
0
1998 2000 2001 2002 2003 2005 2006 2007 2008 2010 2011 2012 2013 2015 2016 2017 2018 2020 2021
Quality of Labour Poor Sales
Source: Bloomberg, NFIB survey, Amundi Research, Data as of 28 February 2021
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INVESTMENT STRATEGY
M&A activity remains very strong, driven 3. The cost of supply is rising. Raw material
THIS MONTH’S TOPIC by the consumer non-cyclical, tech and inflation has picked up, mostly for Covid
communication sectors. Highly leveraged reasons. However, the long-term supply
companies also have the opportunity cost could also be on the rise (significant
to significantly reduce the cost of their raw material needs due to infrastructure
debt. Indeed, activity on the HY primary plans, relocation, environmental costs).
market for refinancing purposes is very In this context, it is time to pay attention
strong. Consequently, on the labour to pricing power within sectors.
The ingredients are in market the context is very different from The already sharp repricing in long-term
2008. Small businesses are struggling global yields will continue driven by a
place to see a structural to hire qualified workers, despite high strong acceleration in the global recovery
change in the inflation unemployment. over the next quarters. The rise in yields
2. The Biden administration is committed will be driven by breakevens and real rates,
regime in the United to increasing potential growth through which both retain upside potential as the
States an infrastructure plan and a reduction recovery progresses. Thanks to continued
of social inequalities. Wage growth in support from the ECB, we expect a very
the last decade has been uneven, with modest rise in German bund yields and
notable growth only at the top while we are maintaining our positive positions
on peripherals. We expect 10Y UST-Bund
wages for most workers have failed to
spreads to continue to widen. We need to
rise. Moreover, this crisis has raised social
closely monitor the risk of rising inflation
inequalities to barely sustainable levels,
in the United States.
mainly affecting low-paid and low-
skilled workers. Today, 40% of the jobless
population are long-term unemployed. Finalised on 24 March 2021
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INVESTMENT STRATEGY
THEMATIC Speculative grade default cycle: an earlier peak
and an expected benign trend
Extraordinary policy intervention has made this HY default cycle unusually
short-lived, helping to limit quite significantly the rise in defaults among
mid- and high-rated speculative grade companies. A turn into a more benign
falling trend over the next quarters looks likely, in light of improved macro
perspectives, expected progress in vaccinations and encouraging signals
from financial drivers.
A short-lived, quite unique cycle Oilfield Service subsectors. The other two
The current cycle has recorded a very sectors accounting for a large proportion
rapid rise in default rates, driven by the of defaults in the US, and struggling
credit effects of the coronavirus-induced more than others with pandemic-related
Sergio BERTONCINI, business disruption, were Retail and
recession and the stress already prevailing
Senior Fixed Income Research
in some sectors like energy and retail, Business Services.
Strategist In terms of credit quality affected, an
especially in the US before the crisis. After
being quite low by historical standards for analysis of the defaults rating breakdown
a long period, the global default rate of probably shows the most striking divergence
speculative grade companies rose rapidly with previous experiences. Even at the time
to its highest levels in the past decade, of writing, which is already seeing the start
doubling in just a few months to 6.6% from of a downward trend in bankruptcies, the
its 3.3% level of February 2020. The initial cycle still looks almost entirely a CCC-rated
shock to economic activity and to financial story, as high and mid-rated companies still
market conditions, though the latter was show very few defaults, close to historically
only short-lived, led credit events to move low levels. Interestingly, as chart 1) shows,
rapidly between March and the summer. current BB-rated and single B-rated
Accordingly, US default rates immediately default rates are still quite low by historical
moved higher from the 4% area, rapidly standards for a recession, even more if
reaching 9% in the summer. European we account for the severity of the 2020
default rates were more resilient in the contraction. In a nutshell, the chart shows
first months of the crisis, also thanks to that both rating categories peaked in terms
much lower exposure to the energy sector of defaults at less than one third of the usual
and higher average credit quality, but recession-high levels. On the contrary, most
then to some extent they closed the gap vulnerable and less “policy-supported” CCC-
partially with the US, moving from a 2% rated default rates have rapidly jumped to
starting level to 5% in autumn. the highest levels of the GFC, namely in the
As we highlighted in previous focuses, 30% area.
the main drivers of the upward trend Another peculiar feature of this default
were US companies in the energy sector, cycle is its limited length, made quite
challenged by depressed oil prices, which short-lived by unprecedented interventions
created a tough operating environment of both fiscal and monetary policies
Rating agencies have Chart1): US HY default rates, by rating
within the Oil & Gas sector, especially (source
through BofA
a very ML)deployment of huge
prompt
progressively cut their in the Exploration & Production and stimulus, ultimately preventing a credit
forecasts on projected
1/ U S HY default rates, by rating
defaults
35% 10%
9%
30%
8%
25% 7%
20% 6%
5%
15% 4%
10% 3%
2%
5%
1%
0% 0%
09-05
04-06
11-06
06-07
01-08
08-08
03-09
10-09
05-10
12-10
07-11
02-12
09-12
04-13
11-13
06-14
01-15
08-15
03-16
10-16
05-17
12-17
07-18
02-19
09-19
04-20
CCCs (l.h.s.) BBs Bs
Source: BofA ML, Amundi Research - Data as of March 2021
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