Credit Continuum – June 2018

Rising European volatility could lead to a reassessment of US credit exposure for European investors.

The recent return of political risk in Peripheral Europe has, we believe, changed investors’ view of credit markets and the role central banks have to play. It has brought into focus the disparity between the monetary policies of the European Central Bank (ECB) and the Federal Reserve (Fed).

In our view it shows in sharp relief how the Fed, which has stopped quantitative easing, is unwinding its balance sheet and is already raising rates, has significantly more firepower to support markets if required, especially as we move towards the latter stages of the economic cycle.

While the ECB has also now signalled an end to its economic stimulus this year, we believe it is still some way behind the Fed; although central banks have in the past shown new and innovative ways of supporting risk assets, and could do so again if needed, the ECB appears to have less options than the Fed.

As a result of this monetary policy divergence, rising yield differentials between the US and Europe may begin to offset hedging costs and tempt European investors to revisit their US exposure.

However, we believe volatility is likely to be a continuing feature of markets. The Trump administration’s conflict-driven stance shows no signs of abating, while political risk has also returned in Europe. In our view, this new world order is likely to feature periods of episodic volatility for the foreseeable future, therefore we remain cognisant of the ongoing need for capital preservation and diversification of risk.

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This document has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past results do not guarantee future performance. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested.

Any research in this document has been procured and may have been acted on by Muzinich for its own purpose. The results of such research are being made available for information purposes and do not constitute investment advice. Opinions and statements of financial market trends that are based on market conditions constitute our judgement as at the date of this document. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted.

Emerging Markets may be more risky than more developed markets for a variety of reasons, including but not limited to, increased political, social and economic instability; heightened pricing volatility and reduced market liquidity.

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