Euro Credit Pilot Strategy - Caution is warranted - UniCredit Corporate & Investment Banking
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This is a shortened version of the Euro Credit Pilot,
which wedeem to be an acceptable minor
non-monetary benefit under MiFID II.
Euro Credit
Pilot Strategy
Macro Research February 2020
Strategy Research
Credit Research
“ Caution is warranted
”February 2020 Credit & Credit Strategy Research
Euro Credit Pilot
Contents Summary
3 Story of the Month Introduction: The outbreak of the coronavirus has already led to the
9 Macro disruption of global supply chains, with numerous producers across
10 Micro Fundamentals sectors reporting production halts at facilities in China. The related
uncertainties warrant defensive positioning in European credit.
11 Credit Quality Trend
12 Market Technicals
■ Macro Outlook: So far there is little data on the initial impact on the
13 Valuation & Timing
global economy, and comparisons with the SARS outbreak in 2002
15 Sector Allocation are not straightforward. But 1Q growth-related data will be negative.
■ Micro Fundamentals: Sluggish earnings growth in Europe will
negatively impact companies’ credit fundamentals.
■ Credit Quality Trend: The global economic outlook has become
clouded, and the risk of economic slowdown in China due to the
coronavirus has increased. Thus, the overall credit quality of
European companies will likely decrease as indicated by the
potential number of fallen angels.
Published on 14 February 2020
Cover picture @ Prajukpunt - Fotolia.com
■ Market Technicals: With the intensification of CSPP purchases,
particularly in the primary market, the ECB is providing
continuous support.
Holger Kapitza,
■ Valuation & Timing: We are keeping our end-2020 spread Credit & High Yield Strategist
projections unchanged. (UniCredit Bank, Munich)
+49 89 378 28745
holger.kapitza@unicredit.de
■ Sector Allocation & Recommendation Overview: Uncertainties
related to the coronavirus and its ramifications for Chinese growth Dr. Stefan Kolek
EEMEA Corporate Credit Strategist
and the global supply chain warrant defensive positioning. In this (UniCredit Bank, Munich)
context, we lower our recommendation on Automobiles & Parts to +49 89 378-12495
stefan.kolek@unicredit.de
underweight from marketweight. We also lower our recommendation
on Basic Resources to marketweight from overweight.
UniCredit Research page 2 See last pages for disclaimer.February 2020 Credit & Credit Strategy Research
Euro Credit Pilot
Story of the Month: The coronavirus and its ramifications for credit
China’s influence on the global economy and its role in global supply chains have changed since 2003
CHART 1:
IBOXX CREDIT PERFORMANCE (TOTAL RETURNS) SINCE THE CORONAVIRUS OUTBREAK*
■ The coronavirus and its economic ramifications remain a key market focus. The high
0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% uncertainty about the duration of the epidemic and its ramifications on Chinese and
Sovereigns global economic growth imply that visibility will remain low. Comparisons with other
Insurance
Industrial Goods & Services
Industrials
epidemics, notably the outbreak of severe acute respiratory syndrome (SARS) in
Regions
Banks Senior
2003 are not straight forward. The current role of China in the global economy is
Banks Subordinated
Sub-Sovereigns now much bigger than it was. China’s economy made up to 8% of global GDP in 2003,
Agencies
Covered whereas it currently accounts for 18%. Moreover, the Chinese economy is much more
Supranationals
Media interconnected (via global supply chains) with other economies than it was during the
Financial Services
Utilities
Non-Financials Senior
SARS epidemic, and the weight of Chinese assets in global benchmark indices (equity
Technology
Construction & Materials
and debt) has been growing steadily over the past few years.
Food & Beverage
Telecommunications
Retail
■ So far, however, the impact from the current coronavirus outbreak has had a rather
Consumer Services
Chemicals
limited impact on European credit. As Chart 1 shows (grey areas), credit across all
Mobile Telecommunications
Consumer Goods
sectors, capital structures and the rating spectrum has generated positive total returns
Basic Materials
Non-Financials Subordinated
since the outbreak of the virus. However, a look at relative performance since the virus’s
Personal & Household Goods
Health Care outbreak and in the three weeks before the outbreak shows 1. that investors seem to be
Automobiles & Parts
Travel & Leisure wary of sectors exposed to China (e.g. Basic Resources, Travel & Leisure, Automobiles
Basic Resources
EUR HY & Parts), causing these sectors to underperform, and 2. that there seems to be a
-2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% preference for safe-haven assets, e.g. sovereign debt, debt issued by regions, senior
bank debt and debt issued by sub-sovereign organizations (see red areas in Chart 1).
Grey bars indicate total returns since 17 Jan. Red bars reflect the difference between total returns
since 17 Jan and total returns from 1 Jan until 17 Jan.
■ The longer the situation lasts, the more investors are likely to start to differentiate
Source: Markit, UniCredit Research between sectors. However, these concerns have so far been alleviated by major
central banks’ readiness to provide liquidity and the PBoC’s interest-rate cut and
massive injection of liquidity into China’s banking sector. On a multi-week horizon, we
expect that technical factors will remain more relevant than fundamentals, which
should also limit market volatility, and this in turn should keep conditions supportive
of carry plays.
UniCredit Research page 3 See last pages for disclaimer.February 2020 Credit & Credit Strategy Research
Euro Credit Pilot
Producers of luxury goods and the Travel & Leisure, Transportation and Automobiles & Parts sectors are particularly
exposed to Chinese supply-chain disruption
CHART 2: SELECTED DISTRIBUTION OF RETAIL SECTORS
100% ■ The outbreak of the coronavirus had already led to disruptions of global supply
Rest of the world 6% Others 6% Rest of the world 9% chains, with numerous producers reporting production halts at facilities in China
90% Other Asia 11% Tobacco 10% across sectors. Moreover, companies that rely on Chinese demand have been
80% affected as demand for their products suffers.
70%
Wine & spirits 16%
■ As Chart 2 shows, Chinese demand for global personal luxury goods, at 33% of the
China 33% Asia Pacific 49% total, is the largest in the world. Asia–Pacific’s share of the global retail travel market
60% is, at 49%, the largest in the world. Separately, many car producers have facilities in
50% Fragrancies & China or rely on Chinese suppliers. Consequently, within the iBoxx index, luxury-
Japan 10% cosmetics 40% goods producers, providers of travel and leisure products, automobiles and parts
40% producers and transportation companies are particularly exposed to a prolonged
Americas 15%
30% Americas 22% coronavirus epidemic, as these sectors depend on the discretionary spending of
Asian consumers.
20% Fashion &
accessories 21% Europe 27% ■ Credit risk in short term should be moderate in Construction & Materials, Food &
10% Europe 18% Beverage, Chemicals and Basic Resources and Real Estate. Prolonged disruption
Confectionery & fine
0% food 7% would, however, also have an adverse impact on these sectors’ credit metrics. The
Global pers. luxury Global travel retail by Global travel retail by Technology sector is certainly also exposed, however, the iBoxx Technology index is
goods market value by category region small and its exposure to China limited. In our view, a temporary (three to six month)
region disruption of supply chains would not fundamentally weaken the credit profiles of
companies in these sectors.
Source: S&P, UniCredit Research
■ Utilities have the lowest exposure to Chinese supply chains. In the case of Oil &
Gas, the recent decline in oil prices has had a limited impact on sector spreads.
However, a prolonged decline in demand from Asia could affect oil prices adversely
(as countermeasures by OPEC+ are questionable) and thus could affect credit
metrics in this sector.
UniCredit Research page 4 See last pages for disclaimer.February 2020 Credit & Credit Strategy Research
Euro Credit Pilot
Credit quality is not likely to be an issue in the short term.
A prolonged period of disruption in Chinese supply chains would, however, create challenges
CHART 3: RATING DISTRIBUTION OF THE IBOXX IG NFI CHART 4: SECTOR DISTRUBUTION OF BBB- RATED CORPORATES IN THE IBOXX INDEX
AAA AA A BBB Weighted average rating (RS)
100%
RES
90% AAA INN 5.2% UTI
6.2% 14.3%
80%
FOB
70% AA
3.1%
BAK
60%
17.7%
50%
ATO
40% A BAS 17.3%
2.1%
30%
TAL THE
20% 1.8% 0.2%
OIG IGS CHE
10% BBB 1.2% 5.2%
MDI 1.3%
0% 3.4% RET HCA TEL
PHG CNS
OIG THE TAL HCA PHG IGS ATO CHE FOB UTI RET TEL BAS MDI CNS 3.5% 10.5% 3.3%
0.3% 3.5%
Source: Markit, UniCredit Research Source: Markit, UniCredit Research
From a more medium-term perspective, however, Basic Resources are likely to suffer Within the BBB- rated universe, beside Banks, the Automobiles & Parts sector is the
from Chinese economic slowdown. The large share of BBB rated credit means that these largest, followed by Utilities and Investment Goods & Services (Chart 4).
cyclical sectors, together with Media, are vulnerable to the second-round effects of a
Chinese economic slowdown (Chart 3).
UniCredit Research page 5 See last pages for disclaimer.February 2020 Credit & Credit Strategy Research
Euro Credit Pilot
Technical factors and Bund performance drive European credit
CHART 5: CORRELATION OF IBOXX CORPORATES WITH BUNDS AND STOXX EUROPE 600*
■ Technical factors remain a key source of support for European credit. These include
0.4 open primary markets and new-bond supply from non-financial companies (NFI)
2015 included in the iBoxx index. Such supply is close to levels seen during the same
2013
Correlation with STOXX Europe 600
period last year – new-bond issuance from issuers not included in the iBoxx index
0.2 2018 and from HY companies is even higher than it was during the same period last year
2017 (see Market Technicals). The ECB’s commitment to continue with its APP for an
2016 unlimited period is also supportive and provides strong support to fixed-income
0 2008 2014 proxies, including corporate credit. This has led these to become more correlated
2011
2019 with government bonds.
2012
■ As Chart 5 shows, the correlation of iBoxx credit with Bund returns is positive and
-0.2 2010 has been high over the past three years. This means that the hunt for yield, on the
2009 back of the ECB’s technical bidding, is a key driver of credit returns, although the
longer duration of the iBoxx index also contributed to the increase in correlation. The
-0.4
2007 Chart also shows that the correlation of credit returns with equity returns used to be
small and has more recently become negative. This is important against the
backdrop of our expectations that there will be a correction in global equity markets
-0.6
0.5 0.6 0.7 0.8 0.9 1 in 1H20. This suggests that European IG credit markets should be (at least to a
Correlation with Bunds certain extent) resilient to a stock market sell-off.
■ With respect to Chinese corporates, data on new-issuance suggest that their
*weekly total returns; in the case of Bunds, total return refers to 1-10Y Bunds primary-market placement has declined since 21 January. Until then, according to
Source: Markit, Bloomberg, UniCredit Research BondRadar.com, Chinese corporates place USD 20bn new (mostly USD-
denominated) issues. Since then, the volume of such placements has declined to
USD 3.5bn. Against this backdrop, Chinese corporates’ access to primary markets
should be monitored going forward. Current funding conditions should however favor
most rated corporates, particularly state-owned ones.
UniCredit Research page 6 See last pages for disclaimer.February 2020 Credit & Credit Strategy Research
Euro Credit Pilot
Medium-term risk factors are significant but unlikely to materialize in our base scenario
CHART 6: CHINESE NFI LEVERAGE VS. LEVERAGE DURING MAJOR FINANCIAL CRISES CHART 7: SHARE OF CHINESE CORPORATES IN JPM CEMBI BROAD INDEX
250
30
Asset price bubble Housing bubble
200 25
Asian crisis
Subprime crisis
20
150
% of GDP
15
%
100
10
50
5
China Thailand Japan United States Spain
0 0
May-02
Nov-04
Jul-06
Sep-05
May-07
Nov-09
Jul-11
Nov-14
Jul-16
Nov-19
Sep-10
May-12
Sep-15
May-17
Mar-03
Jan-04
Mar-08
Jan-09
Mar-13
Jan-14
Mar-18
Jan-19
Jan-80
Jan-86
Jan-92
Jan-98
Jan-04
Jan-10
Jan-16
Source: Bank for International Settlements, UniCredit Research Source: Bloomberg, JPMorgan, UniCredit Research
The risk of economic slowdown in China comes at a point, when the leverage of the With 25% (Hong Kong makes additional 6.7%), the share of Chinese corporates on the
Chinese corporates has reached levels observed during the major financial crises in JPM CEMBI index is of systemic relevance (Chart 7). While a large part of the issuers
recent history (Chart 6). While a temporary impact on the Chinese economy is unlikely operate in sectors such as Financials, Oil & Gas, Infrastructure, TMT and Real Estate –
to create a debt problem, a prolonged dampening of economic activity would create for which are not directly affected by the corona virus, a prolonged period of economic
many leveraged companies a balance sheet problem. While the share of Chinese NFIs paralyses creates the risk of downgrades. Taking into account that a large part of the
in iBoxx index is with less than 2% very small, the relevance of Chinese corporates is issues are IG-rated, which attracted “yield tourists”, which are mostly buy and hold
particularly relevant of EM credit investors. However, unless the epidemic continues for investors, there is a risk of forced sellers in the case of downgrades leading to fallen
several quarters, we see the risk of a balance sheets recession in China as limited. angels, a risk which is not priced in in EM credit currently.
UniCredit Research page 7 See last pages for disclaimer.February 2020 Credit & Credit Strategy Research
Euro Credit Pilot
Bottom line: despite risks stemming from China, we continue to recommend carry plays in European credit
CHART 8: VIX VOLA. INDEX VS. VIX NET SHORT POSITIONS
■ Bottom line, the coronavirus and its ramifications for the global supply chain are
VIX net short positions VIX (rs)
150,000 90 likely to remain key focus of European credit investors going forward. At this stage,
80 the moment the ramifications for the credit are contained. Market expects – on the
100,000
back of Chinese press reports – that the virus should peak by the end of the month,
70
50,000 implying that we could see a V-shape recovery in 2Q.
0
60 ■ Key support for European credit comes from the technical backdrop: the new bond
50
supply from iBoxx NFIs is close to levels seen during the same period last year (and
-50,000 thus market neutral), while the ECB remains committed to its APP for an unlimited
40 period. The latter provides a strong support to fixed income proxies including
-100,000
30 corporate credit, leading them to be more correlated with government bonds than
-150,000
with equities.
20
■ Investors’ perception that major central banks will stick to their dovish policies (and in
-200,000 10 case of need, even scale them up) has kept volatility in global markets low. Volatility
-250,000 0
indices are trading close to all-time lows, and investors seem to expect the low-
volatility environment to continue going forward. This is reflected in Chart 8, which
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19 shows that the net short position in Chicago Board Options Exchange Volatility Index
(VIX) futures is close to an all-time high. At the same time, however, this constellation
Source: Bloomberg, UniCredit Research reveals a source of risk to the market: should there be an unexpected event that leads
to a sharp increase in volatility, catching investors off guard.
■ With volatility close to all-time lows, central banks committed to their dovish policies,
with Bunds driving credit, we reiterate our recommendation to keep carry positions in
subordinated NFI debt and AT 1 Bank debt. http://unicredit-
globalresearch.application.hypovereinsbank.de/Docs/fxfistrategy_docs_9999_17569
7.pdf.ashx
UniCredit Research page 8 See last pages for disclaimer.February 2020 Credit & Credit Strategy Research
Euro Credit Pilot
Macro: Chinese economic growth is in the limelight
The composition of Chinese economic growth has shifted to domestic demand
CHART 9: CHINA GDP GROWTH AND ITS COMPOSITION CHART 10: CHINESE CPI AND FOOD PRICES
20 25 CPI Food prices CPI ex food
Net exports Gross capital formation
Final consumption GDP 20
15
15
10 10
% yoy
%
5
5
0
0
-5
-10
-5
Sep-05
May-06
Sep-07
May-08
Sep-09
May-10
Sep-11
May-12
Sep-13
May-14
Sep-15
May-16
Sep-17
May-18
Sep-19
Jan-05
Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
Jan-17
Jan-19
1/1/2000
1/1/2001
1/1/2002
1/1/2003
1/1/2004
1/1/2005
1/1/2006
1/1/2007
1/1/2008
1/1/2009
1/1/2010
1/1/2011
1/1/2012
1/1/2013
1/1/2014
1/1/2015
1/1/2016
1/1/2017
1/1/2018
1/1/2019
Source: UniCredit Research Source: UniCredit Research
So far, no data reflecting the first impact on economy have been released, and Also negative for the Chinese consumer is a recent surge in food prices, and the
comparisons with the SARS outbreak in 2002 are not straightforward. The outbreak at coronavirus has contributed to this (Chat 10). All in all, Chinese economic growth is
that time coincided with the 2003 US invasion of Iraq, which affected PMIs globally. expected to experience a set back at least in 1Q, with ramifications going forward
Moreover, Chinese economic growth today is much more dependent on Chinese dependent on the duration of the coronavirus outbreak.
consumers (who are directly affected) than it was in 2002, while in 2002-03, investment
demand was its major driver (Chart 9).
UniCredit Research page 9 See last pages for disclaimer.February 2020 Credit & Credit Strategy Research
Euro Credit Pilot
Micro Fundamentals
Sluggish earnings growth in Europe to negatively impact companies’ credit fundamentals
CHART 11: 4Q19 EARNINGS SEASON (STOXX EUROPE 600) CHART 12: IBOXX NFI IG VS. CONSENSUS EARNINGS ESTIMATES (STOXX EUROPE 600)
Positive Negative Aggregated earnings growth yoy (rs) 12M forward earnings estimates (rolling 1M)
80 30% iBoxx NFI Sen (rolling 1M, inverted, rs)
30 40
60 20%
40
Earnings growth yoy
Number of companies
10% 28
20 50
Earnings per share
0 0%
26
-20 -10%
60
bp
-40
-20% 24
-60
Start of
-80 -30% CSPP 2.0 70
Oil & Gas
Basic Materials
Consumer
Consumer
Telecom
Technology
Industrials
Health Care
Utilities*
Financials
All securities
22
Services
Goods
End of
CSPP 1.0
20 80
2013 2014 2015 2016 2017 2018 2019 2020
*Utilities earnings growth at -56% yoy Source: Bloomberg, UniCredit Research Source: Bloomberg, UniCredit Research
In Europe, the 4Q19 earnings season has had a weak start. In the STOXX Europe 600 (after The 12M forward consensus estimates for European companies in the STOXX Europe
50% of companies have reported results), earnings growth has declined by 1.8% yoy, with only 600 have moved sideways since the beginning of the year. The chart above shows that
84 out of 217 companies showing positive earnings growth. Negative earnings growth has credit spreads have become decoupled from earnings expectations. This is due to the
mostly prevailed in sectors such as Utilities (-56% yoy, so far only 3 of 22 companies have CSPP’s distortion. However, our expectation of low earnings growth in Europe this year
reported), Oil & Gas (-24%), Basic Materials (-21%), and Industrials (-8%), while will continue to weigh on the credit fundamentals of European companies.
Telecommunications (+22%), Financials (+18%) and Technology (+17%) have outperformed.
UniCredit Research page 10 See last pages for disclaimer.February 2020 Credit & Credit Strategy Research
Euro Credit Pilot
Credit Quality Trend
The global economic outlook has become clouded, and the risk of economic slowdown in China due to coronavirus has increased.
Thus, the overall credit quality of European companies will likely decrease as indicated by the potential number of fallen angels.
CHART 13: RATING BALANCE OF IBOXX NFI CHART 14: GLOBAL RATING MIGRATION RATES FOR BBB RATED COMPANIES (CURRENT
PERIOD COMPARED TO FORECAST)*
Upgrades Downgrades 12 month average net change (rs) 12 month average number of actions (rs)
15 15
Fallen angel Baa3 Baa2 Baa1
100%
10 10
90%
12 month average number of actions
80%
5 5
Number of rating actions
70%
0 0 60%
50%
-5 -5
40%
30%
-10 -10
20%
-15 -15 10%
0%
-20 -20 Baa1 Baa1 Baa2 Baa2 Baa3 Baa3
199920002001200220032004200520062007200820092010201120122013201420152016201720182019
Current Forecast Current Forecast Current Forecast
Source: iBoxx, UniCredit Research
*current rates from Feb 2019 to Jan 2020, forecast from Feb 2020 to Jan 2021, excluding rating withdrawals, fallen
angels= non-investment grade plus defaults Source: Moody’s, UniCredit Research
Although corporate defaults have been low across most industries (Moody’s corporate
default rate for Europe was at 0.7% at end-January 2020), the rating balance of European
The chart shows rating transition for BBB rated companies, highlighting rating movements
non-financial firms included in the iBoxx is still negative (see red line in chart).
to Baa1 and below. Within the current period, it reveals that, unsurprisingly, most fallen
Given our expectation that economic growth will slow (and that this will likely constrain angels have come from Baa3 rated companies. This also applies to the forecast period.
revenue and profitability), we think that challenging market conditions will likely drive the However, surprisingly companies rated Baa2 (almost 4.6 times higher than the current
European rating balance into more-negative territory. period) and Baa1 (up by 100%) show significant increases in the forecast period.
UniCredit Research page 11 See last pages for disclaimer.February 2020 Credit & Credit Strategy Research
Euro Credit Pilot
Market Technicals
With the intensification of CSPP purchases, particularly in the primary market, the ECB is providing continuous support
CHART 15: IG-RATED ISSUANCE VOLUMES OF NON-FINANCIALS (NFI) CHART 16: ECB CSPP BUYING ACTIVITY
Non-iBoxx NFI IG iBoxx NFI CSPP, weekly net changes/additions CSPP, four-week moving average (rs)
3.0 3.0
60
2.5 End of CSPP 1.0 2.5
50
2.0 2.0
40 1.5 1.5
Start of
EUR bn
EUR bn
CSPP 2.0
EUR bn
30 1.0 1.0
0.5 0.5
20
0.0 0.0
10
-0.5 -0.5
0 -1.0 -1.0
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
Jun-16
Feb-17
Jun-17
Feb-18
Jun-18
Feb-19
Jun-19
Aug-16
Oct-16
Dec-16
Aug-17
Oct-17
Aug-18
Oct-18
Aug-19
Oct-19
Apr-17
Dec-17
Apr-18
Dec-18
Apr-19
Dec-19
Jan Feb* Mar Apr May Jun Jul Aug Sep Oct Nov Dec
*as of 11 February 2020 Source: Bloomberg, UniCredit Research Source: Bloomberg, ECB, UniCredit Research
Overall, NFI have issued a sizeable amount of debt so far this year. New supply from NFI The ECB’s lively purchasing activity over the last few weeks pushed its four-week purchasing
has amounted to EUR 48.9bn YTD, up 22.2% yoy. This has been largely driven by NFI average to EUR 1,225mn last week. In particular, in January, the ECB purchased EUR 4.6bn
included in the iBoxx index (EUR 34.7bn, +2.2% yoy). Supply from non-iBoxx NFI has of bonds. Of this, EUR 3.6bn worth were purchased on the primary market.
amounted to EUR 11.9bn (+135.2% yoy). Overall, we expect gross issuance from IG NFI Looking ahead, we think that CSPP purchasing volumes will settle around EUR 4bn a
in the iBoxx to amount to EUR 300-330bn in 2020, with upside risks stemming from the month. This will provide technical support to credit. This is due to both our expectation of
prefunding of 2021 maturities. Due to borrowing costs in Europe being lower than they are continued-high primary-market activity (which is likely to be absorbed in part by the ECB)
in the US, sales of reverse Yankee bonds have amounted to about 25% of this year’s NFI and the notable redemption volumes in the CSPP portfolio this year (EUR 16bn from the
issuance volume (down from 31% at this time last year). We assume that the supply of reverse end of February to the end of the year).
Yankee will decline, given our expectation that the Fed will cut rates by 100bp in 2020.
UniCredit Research page 12 See last pages for disclaimer.February 2020 Credit & Credit Strategy Research
Euro Credit Pilot
Valuation & Timing
We are keeping our spread projection unchanged
CHART 17: OUR MACRO-CREDIT MODEL FOR EUROPEAN NON-FINANCIALS CHART 18: SPREAD IMPACT OF CSPP 2.0
iBoxx € Non-Financials Senior Basis iTraxx Europe 5Y
iTraxx Non-Financials (implied, ls)
250 -1.25% 140
12M fwd growth exp. (shifted by 2M) End of CSPP 1.0
Consensus growth exp. (12M fwd.)
120
Projection -0.75%
200
UniCredit forecast 100
Start of
-0.25% CSPP 2.0
iTraxx Non-Financials (bp)
80
150
Credit spreads (bp)
0.25%
60
0.75%
100 40
1.25% 20
50
1.75% 0
-20
0 2.25%
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
-40
Oct-15
Oct-16
Oct-17
Oct-18
Oct-19
Jan-15
Apr-15
Apr-16
Apr-17
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Apr-18
Jul-18
Jan-19
Apr-19
Jul-19
Jan-20
Source: Bloomberg, iBoxx, UniCredit Research Source: iBoxx, UniCredit Research
We are keeping our spread projections unchanged for end-2020: both the iBoxx Non- Given the impact of the coronavirus outbreak on the global economy, we expect sectors
Financials Senior index and the iBoxx Financials Senior index at 60bp and HY at 450bp. We like Automobiles & Parts and Travel & Leisure to underperform in the short term (see
expect corporate hybrids to widen by 20bp, while AT1 bonds are expected to trade sideways. Sector Allocation).
These forecasts reflect the spread-tightening impact of the renewed CSPP 2.0 while Funding conditions for European IG non-financials companies eased due to the unusual
acknowledging that the gap between technically driven and fundamentally justified spread late-cycle dovish pivot delivered by the ECB through the resumption of the CSPP 2.0. As a
levels is increasing. result, credit spreads are continuously supported by the renewed purchasing activities of
the ECB as part of CSPP 2.0.
UniCredit Research page 13 See last pages for disclaimer.February 2020 Credit & Credit Strategy Research
Euro Credit Pilot
SPREAD FORECAST 2020 (forecast level, minimum and maximum level, in BP)
Non-financials senior Financials senior
iBoxx NFI sen. iTraxx NFI iBoxx FIN sen. iTraxx FinSen
120 120 120 120
actual forecast actual forecast
100 100 100 100
80 80 80 80
60 60 60 60
40 40 40 40
20 20 20 20
0 0 0 0
Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20
High yield Corporate hybrids and bank AT1s
iBoxx HY iTraxx Xover iBoxx NFI hybrids AT1
600 600 400 700
iBoxx NFI Hybrids (in bp)
actual forecast
actual forecast
350 600
450 450 300
500
250
AT1 (in bp)
400
300 300 200
300
150
200
150 150 100
50 100
0 0 0 0
Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20
Source: Bloomberg, Markit, UniCredit Research Source: Bloomberg, Markit, UniCredit Research
UniCredit Research page 14 See last pages for disclaimer.February 2020 Credit & Credit Strategy Research
Euro Credit Pilot
Sector Allocation: We keep our overweight recommendation on subordinated bank and non-financial debt
■ Our concerns about cyclical risks became more relevant following the outbreak of the TABLE 1: SECTOR ALLOCATION
coronavirus in China. While so far European credit remains resilient to the credit risk Current YTD spread Current
stemming from decline in Chinese economic activity and disruptions of supply chain, due As of 13 February 2020 recommendation iBoxx weight change spread level
to supportive technical factors. In medium term, a prolonged decline of economic activity Macro allocation
Sovereigns 58.6% -3.1 13.2
in China makes particularly Travel & Leisure, Automobiles & Parts, luxury goods issuers
Sub-Sovereigns MW 13.0% -1.0 2.1
and Transportation credit vulnerable. As the related cyclical headwinds will persist in the Covered Bonds MW 7.6% -2.2 2.9
coming weeks, we reiterate our defensive positioning in European credit. Financials MW 8.5% -1.1 59.4
Non-Financials MW 12.3% +1.4 55.4
■ We already have an underweight recommendation on Technology, Chemicals and
Sector allocation NFI
Travel & Leisure, i.e. those cyclical sectors that are trading with particularly tight credit- Telecommunications TEL MW 11.9% +2.6 59.6
risk premiums. We lower our recommendation of Automobiles & Parts from Media MDI MW 2.3% -1.8 59.9
marketweight to underweight. The sector is among the most exposed to the Chinese Technology THE UW 4.2% +3.8 37.0
supply chain and to the Chinese consumer. Moreover, the sector FY19 results season Automobiles & Parts ATO UW 12.2% +3.9 77.4
has also been weak, reflecting cyclical headwinds, and we expect sector 1Q20 results Utilities UTI OW 17.1% +0.4 55.4
Oil & Gas OIG MW 7.7% +4.6 46.9
to be additionally affected by the coronavirus, in particular companies with high sales,
Industrial Goods & Services IGS MW 11.5% -7.3 54.0
production and supply chain exposure to China. Given the uncertainties with regard to
Basic Resources BAS MW 1.5% +2.5 78.1
continued but lower growth prospects in China, we have also become more cautious on Chemicals CHE UW 3.2% +1.4 40.8
the Basic Resources sector and reduce our overweight recommendation on the sector Construction & Materials CNS OW 2.2% -0.4 52.0
to marketweight. We stress, however, that the financial profiles of companies in the Health Care HCA MW 10.3% +4.1 52.7
sector are generally strong enough to withstand a more challenging market Personal & Household Goods PHG MW 4.1% +1.4 56.3
environment. We keep our overweight sector on Construction & Materials, given the still Food & Beverage FOB MW 7.3% +5.0 40.8
appealing carry, its late-cycle nature, and expectations of a prolonged period of low Travel & Leisure TAL UW 2.8% +0.0 43.3
Retail RET MW 1.7% +5.9 62.5
interest rates, which is supportive of activity in the sector. All in all, our preference is still
Quality allocation NFI
for non-cyclical sectors, notably Utilities, which we have on overweight. We continue to AAA UW 0.6% +4.5 22.6
maintain a marketweight recommendation on all other sectors. This reflects our view AA UW 8.8% +4.5 20.5
that credit-risk premiums will remain stable, with carry the main source of return. A MW 34.0% +3.8 39.7
BBB OW 56.6% +0.4 70.6
■ Within the capital structure, we have an overweight recommendation on both financial Sector other
Banks BAK MW
and non-financial subordinated debt. With respect to rating quality, we have an OW
Insurance INN MW
recommendation on BBB rated credit, which offer a higher carry and an UW
Real Estate RES MW
recommendation on AA and AAA rated corporates. In HY, we prefer BB rated corporates.
Source: UniCredit Research
UniCredit Research page 15 See last pages for disclaimer.February 2020 Credit & Credit Strategy Research
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1
TABLE 2: ANNUALIZED CREDIT RETURNS RESULTING FROM INDIVIDUAL SWITCHING STRATEGIES COMPARED TO A BUY-AND-HOLD STRATEGY
Last month, credit return YTD annualized credit return LTM annualized credit return LTM volatility
Bench Model Bench Model Bench Model Bench
Riskier Defensive Strategy Riskier Defensive mark excess Riskier Defensive mark Model excess Riskier Defensive mark Model excess Riskier Defensive mark Model
Non-Financials -0.23%
NFI_SUB NFI_SEN -0.46% 0.26% 0.23% 0.04% -5.52% 3.17% 2.73% 3.17% 0.44% 7.50% 3.17% 3.40% 3.17% 3.85% 2.11% 2.15% 2.11%
capital structure
NFI_SEN_BB NFI_SEN_AAA Non-Financials -1.36%
0.33% 0.18% 0.23% -0.05% 4.00% 2.11% 2.73% 2.11% -0.62% 4.06% 2.03% 3.40% 2.03% 2.30% 1.89% 2.15% 1.89%
B _A rating
NFI_SEN_CY Non-Financials -0.16%
NFI_SEN_NCY 0.23% 0.29% 0.23% 0.07% 2.78% 3.52% 2.73% 3.52% 0.78% 3.09% 3.24% 3.40% 3.24% 2.01% 2.21% 2.15% 2.21%
C cyclicality
NFI_SEN_GT Non-Financials -1.92%
NFI_SEN_LT5 0.41% 0.08% 0.23% -0.14% 4.89% 1.01% 2.73% 1.01% -1.73% 4.58% 1.48% 3.40% 1.48% 3.10% 0.97% 2.15% 0.97%
5 duration
Financials -0.70%
FIN_SUB FIN_SEN -0.46% 0.21% 0.14% 0.07% -5.52% 2.51% 1.62% 2.51% 0.89% 7.50% 2.94% 3.64% 2.94% 3.85% 1.64% 1.91% 1.64%
capital structure
Financials sen -0.70%
FIN_AT1 FIN_SEN 1.01% 0.21% 0.14% 0.07% 12.13% 2.51% 1.62% 2.51% 0.89% 15.66% 2.94% 3.64% 2.94% 5.91% 1.64% 1.91% 1.64%
vs. AT1
FIN_SEN_BB FIN_SEN_AAA Financials -1.50%
0.46% 0.11% 0.14% -0.03% 5.48% 1.26% 1.62% 1.26% -0.36% 5.07% 2.14% 3.64% 2.14% 2.22% 1.47% 1.91% 1.47%
B _A rating
FIN_SEN_GT Financials -1.75%
FIN_SEN_LT5 0.34% 0.13% 0.14% -0.01% 4.07% 1.52% 1.62% 1.52% -0.10% 4.67% 1.89% 3.64% 1.89% 2.68% 1.03% 1.91% 1.03%
5 duration
COV_A_BBB COV_AAA_AA Covered rating 0.34% 0.20% 0.21% -0.01% 4.12% 2.45% 2.52% 2.45% -0.07% 1.86% 0.86% 0.91% 0.86% -0.05% 1.01% 0.40% 0.43% 0.40%
COV_Periphe COV_NonPerip Covered -0.29%
0.31% 0.19% 0.21% -0.02% 3.75% 2.24% 2.52% 2.24% -0.28% 2.16% 0.62% 0.91% 0.62% 0.80% 0.36% 0.43% 0.36%
ry hery country
High Yield -1.79%
HY_B_CCC HY_BB 0.09% -0.72% -0.49% -0.23% 1.10% -8.61% -5.90% -8.61% -2.71% 15.85% 9.31% 11.10% 9.31% 8.50% 4.52% 5.46% 4.52%
rating
High Yield -2.28%
HY_GT5 HY_LT5 -0.74% -0.29% -0.49% 0.20% -8.87% -3.49% -5.90% -3.49% 2.41% 14.67% 8.82% 11.10% 8.82% 7.62% 4.28% 5.46% 4.28%
duration
Source: iBoxx, UniCredit Research
1
NFI refers to non-financials, FIN to financials, COV to covered bonds and HY to high yield. LT5 and GT5 refer to maturities of less than and greater than five years, respectively. NFI_SEN_NCY and NFI_SEN_CYC refer to non-cyclical non-
financials and cyclical non-financials, respectively.
UniCredit Research page 16 See last pages for disclaimer.February 2020 Credit & Credit Strategy Research
Euro Credit Pilot
AVERAGE SECTOR ASW SPREAD VS. MODIFIED DURATION AND AVERAGE RATING (BUBBLE SIZE CORRESPONDS TO SIZE OF SECTOR, SECTORS [LS], HYBRIDS [RS])
350
100
Automobiles & Parts
(A-) 300
80 Telecommunications
(BBB+)
Hybrid bond spreads (in bp)
Utilities (BBB+)
Sector spreads (in bp)
Retail (BBB+)
Basic Resources
(BBB+) 250
60 Media (BBB+) Construction & Industrial Goods &
Materials (BBB) Services (A-)
Food & (A-)
Health Care
Beverage (A-)
Oil & Gas (A) 200
40 Chemicals (BBB+)
Travel & Leisure (A)
Technology (A)
Personal & Household
Goods (A)
20 150
Hybrid Bonds (BBB)
0 100
3.4 3.9 4.4 4.9 5.4 5.9 6.4 6.9 7.4
mDur
Source: iBoxx, UniCredit Research
UniCredit Research page 17February 2020 Credit & Credit Strategy Research
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UniCredit Research page 19February 2020 Credit & Credit Strategy Research
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UniCredit Research* Credit & Credit Strategy Research
Erik F. Nielsen Dr. Ingo Heimig
Group Chief Economist Head of Research Operations
Global Head of CIB Research & Regulatory Controls
+44 207 826-1765 +49 89 378-13952
erik.nielsen@unicredit.eu ingo.heimig@unicredit.de
Head of Credit Research Heads of Strategy Research Credit Strategy Research
Dr. Luca Cazzulani Elia Lattuga Dr. Stefan Kolek
Dr. Sven Kreitmair, CFA Co-Head of Strategy Research Co-Head of Strategy Research Holger Kapitza EEMEA Corporate
Head of Credit Research FI Strategist Cross Asset Strategist Credit & High Yield Strategy Credits & Strategy
+49 89 378-13246 +39 02 8862-0640 +44 207 826-1642 +49 89 378-28745 +49 89 378-12495
sven.kreitmair@unicredit.de luca.cazzulani@unicredit.eu elia.lattuga@unicredit.eu holger.kapitza@unicredit.de stefan.kolek@unicredit.de
Financials Credit Research
Franz Rudolf, CEFA Dr. Michael Teig
Head Deputy Head Matthias Dax Tobias Keller
Covered Bonds Banks Sub-Sovereigns & Agencies, ESG Florian Hillenbrand, CFA Banks
+49 89 378-12449 +49 89 378-12429 +49 89 378-13946 Securitization +49 89 378-12960
franz.rudolf@unicredit.de michael.teig@unicredit.de matthias.dax@unicredit.de florian.hillenbrand@unicredit.de tobias.keller@unicredit.de
Natalie Tehrani Monfared
Julian Kreipl, CFA Regulatory & Accounting Service,
Covered Bonds Insurance, Real Estate
+49 89 378-12961 +49 89 378-12242
julian.kreipl@unicredit.de natalie.tehrani@unicredit.de
Corporate Credit Research
Christian Aust, CFA
Head Gianfranco Arcovito, CFA Dr. Sven Kreitmair, CFA Ulrich Scholz, CFA, FRM
Industrials, Oil & Gas Utilities, Hybrids Sergey Bolshakov Automotive & Mobility Telecoms, Technology
+49 89 378-17564 +49 89 378-15449 EEMEA Corporates & Financials +49 89 378-13246 +49 89 378-41847
christian.aust@unicredit.eu gianfranco.arcovito@unicredit.de sergey.bolshakov@unicredit.eu sven.kreitmair@unicredit.de ulrich.scholz@unicredit.de
Jonathan Schroer, CFA
Telecoms, Media/Cable, Logistics, Jana Schuler, CFA Dr. Silke Stegemann, CEFA
Business Services Industrials Health Care & Pharma, Consumer
+49 89 378-13212 +49 89 378-13211 +49 89 378-18202
jonathan.schroer@unicredit.de jana.schuler@unicredit.de silke.stegemann@unicredit.de
UniCredit Research, Corporate & Investment Banking, UniCredit Bank AG, Am Eisbach 4, D-80538 Munich, globalresearch@unicredit.de
Bloomberg: UCCR, Internet: www.unicreditresearch.eu
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(Bank Austria), UniCredit Bulbank, Zagrebačka banka d.d., UniCredit Bank Czech Republic and Slovakia, ZAO UniCredit Bank Russia (UniCredit Russia), UniCredit Bank Romania.
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