A buoyant US & stuttering Europe demands quality-focused credit strategy: Amundi

A persistently strong US economy and stagnant Europe will demand a more quality-focused strategy from investors, says Europe’s largest asset management firm, Amundi.

Amaury D’orsay, Amundi’s head of fixed income, has urged investors to seek “quality credit and valuations”, particularly in European markets, as the continent’s economy continues to be hobbled by weak growth.

According to D’orsay, in this environment, corporate credit does present good opportunities for investors – however, he cautions investors to adopt a more defensive strategy on credit.

High yield risk/reward remains “sub-optimal”, he said, with the analyst urging for greater caution in low-rated areas such as B- and CCs.

On investment grade credit, however, with valuations considered “decent from a historical perspective”, D’orsay said he prefers BBB, which hit a “sweet spot of quality and return”.

“We also like medium-term maturities and the banking sector,” he added.

“In addition, investors may consider the primary market for attractive high-quality names, as was the case in January.”

Investors should, nevertheless, be mindful of the continued disruptions to global shipping, including the Red Sea crisis, which, if it persists, could increase inflation risk.

D’orsay says Amundi is “monitoring these risks and for how long they last and stay a bit defensive on duration tactically, although we are agile in adjusting this stance”.

Don’t bank on US rate cuts coming soon – or falling much

With a still buoyant US economy, Amundi predicts the Federal Reserve will hold off on long-anticipated policy rate cuts until at least the end of May.

“We maintain our view on Fed rate cuts but this relies on inflation coming down and economic activity slowing. Thus, we stay mildly constructive and recognise the need to be active in an election year with any potential fiscal push.

The investment firm maintains that rates, moreover, are unlikely to move significantly if the economy remains strong.

According to Amundi, agency MBS, a pooled asset of US government-guaranteed residential mortgage loans, offer an additional income and its valuations are also fair relative to history.

The firm also sees value in investment-grade credit, with financials rated over non-financials.

D’orsay said the firm maintains its positive stance on emerging market debt, though it urged investor vigilance over geopolitical risks in the Middle East and Ukraine, along with US inflation surprise and idiosyncratic risks which “could create surprises”.

China’s stimulus efforts are also “unlikely to be a game-changer in the long term”, Amundi estimates, with Turkey’s “unconventional monetary policy” considered unsustainable.

D’orsay said the firm currently “likes” emerging market hard currency and corporate debt but “favours” high yield over investment grade, “given better valuations”.