Pimco backs financials for corporate debt gains

Shorter-dated investment grade credit, financials and high yield continue to offer bond opportunities in a rising sovereign risk environment, according to Pimco.

Luke Spajic, the head of pan-­European credit portfolio management at the group, says that as companies reduce their debt while governments re-lever, bond markets should turn increasingly positive for corporate debt.

Pimco has taken a house decision to go overweight financials in light of the changing dynamics forcing banks to be utility-like in nature, with a stable earnings profile.

Spajic says it is inevitable that investors will move away from risky high-performing products with excessive leverage. This will help the long-term stability of financials, he says.

Spajic expects banks to become more utility-like, with a greater reliance on contingent capital, which can convert to equity under stressed scenarios. (article continues below)

Spajic is also positive on emerging market credit but acknowledges ­limited liquidity as the sector is still in its infancy.

Like many of his equity counterparts, Spajic is pushing the global nature of the British credit market.

He points out that only 52% of the sterling corporate index is made up of British issuers. Of these, he says, a substantial proportion have high overseas earnings.

Spajic says it is too early to say whether peripheral eurozone econ­omies will recover, and that spreads have widened significantly compared with core eurozone countries.

Pimco is “sitting on the sidelines”, says Spajic, and will only buy household names in small quantities, if anything at all.