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European Credit Markets

Stars Aligned vs. Perfect Storm


I gave a title to this presentation, which is on European credit markets, namely Stars Aligned or Perfect Storm. Starting the year or ending last year we did our annual outlook thinking of upsides at Eiffel and we were thinking it’s incredible how contrasting the picture is, if we look at where we are today. All the signals are very bullish, green lights, etc; on the other hand we can’t help thinking about the tons of risks on the horizon and how they can play out over the year. That’s really what is driving our current positioning in our portfolios and our thinking process and the framework we have for investing in Europe and credit at the moment.

Macro tailwinds in Europe

I’ll start with the blue sky, where there are clearly good fundamentals. We are fundamental bottom-up credit people - we are not top-down people - but there will be a lot of things I will show you which are a bit top-down because I didn’t want to get into individual names, etc. You’ll see we have to look at the macro environment, and it’s very interesting to see that for a very long time in Europe it hasn’t been that favourable. But you now really have a tailwind from the macroeconomic environment in most countries, whereas it was really very divergent in the past few years in Europe. For the first time, the economic forecast is improving.

At the same time if you turn the clock back 12 or 18 months, you will remember what the fear was in Europe. It was, “oh, my god, we’re getting into deflation, it’s getting out of control, the ECB is doing incredible things because we’re in negative inflation, with core inflation slightly below 2% mandate, etc”.

Now, the index of inflation surprises is improving. The fundamentals are a clear blue sky, we like it. In credit we don’t want it to be too hot, but, in Europe it’s never too hot, it’s rather too cold. Take Greece - and I’m not talking about the weather - I’m talking about the economy.

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