Euro Credit at Turning Point

Patrick Dewayne:

It’s Euro Finance Week and also a topic is fixed income in European markets and it's my pleasure to talk about this topic with Andy Li, senior portfolio manager from MFS. Andy, it's great that you're here.

Andy Li:

Thanks for having me. It's great to be here.

Patrick Dewayne:

I have a question regarding the past, the present, and the future. So '23, '24, and '25. Which have been the top performers that you saw and that you will see?

Andy Li:

Yeah, we've seen the financial banking sector really outperform over the last 12 to 18 months, and also the real estate sector, as well. We're still finding a lot of opportunities in here. Evaluations have come in a lot, but if you do your security selection, there are definitely opportunities in these two sectors. And the third sector we really like is the utility sector. The utility sector trades cheap, versus some of your more cyclical industrials, and that's because we've seen a lot of primary issuance, which has cheapened up valuations due to the heavy spending needed by utilities due to the European transition. So we think over the next 6 to 12 months, there will be some very good opportunities in these three sectors.

Patrick Dewayne:

Is there a certain sector within the next six months that, from your perspective, will dominate the others?

Andy Li:

Yeah, it's really, again, focusing back on the utility sector. Some of these companies have very stable balance sheets, very predictable cash flows. And because of their defensive nature and we're going into potentially a lower growth period in Europe, we think there's some really good opportunities in the sector.

Patrick Dewayne:

How could your clients prosper from the credit allocation that you at MFS are offering?

Andy Li:

Yeah, sure. So the big topic in European credit at the moment is that the spread environment is very tight. However, if you look at the overall yield, this looks very attractive on a historical basis. So the key going forward, because spreads are so tight, is really to focus on security section and sector allocation. So throughout different cycles, different companies and different sectors will perform differently. So it's really important to look ahead to see if you're being well-compensated at this point in time.

Patrick Dewayne:

What do you give your clients as an advice which key factors they should consider when it comes to investing in Euro debt?

Andy Li:

Sure. There's a few things here that we focus on. Obviously, firstly, is fundamentals. So looking at company balance sheets and the cash flows. We spend a lot of time meeting with management to discuss their forecasts, to understand how much risk that they're willing to take and to ensure that the business is how we think they're going to perform over the next cycle.

Patrick Dewayne:

Why is it so important, from your perspective, to be proactive in that matter?

Andy Li:

Sure. Being an active manager, I think, is hugely important in European credit. There's lots of inefficiencies that an active manager can extract to produce long-term alpha, and this could be derived from liquidity reasons. We have lots of different investors with different time horizons, and we have rating agencies also causing lots of dislocations. A very good example of this, also, would be the fixed income index. We feel this is poorly constructed because the largest issuers are the most heavily indebted issuers, which means that allocating capital passively may not be the most appropriate way. And finally, what I call the biodiversity of fixed income. You have one issuer that can issue in multiple currencies, multiple maturities across the different capital structure so it's really interesting and looking for these opportunities in European credit.

Patrick Dewayne:

Thank you very much, Andy Li, for sharing your insights and your expertise, and wishing you all the best for 2025.

Andy Li:

Thanks very much.

 

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