Barclays Wealth chief investment officer for Europe Kevin Gardiner says European sovereign and credit markets can continue to outperform peers such as global treasuries thanks to the region’s “muted” recovery and peripheral markets.
Gardiner notes that European credit has already outperformed the US over the past two years and has so far outperformed the US year to date by 4.4 per cent to post a return of 1.1 per cent.
Despite an overall “difficult fixed income market”, Gardiner believes that both European sovereign and credit markets can continue to outperform their global peers.
He says: “The main European government indices are likely to continue to outperform global treasuries simply because they include Italy and other pro-cyclical peripheral markets, and because growth and inflation will remain much more muted than in the US.”
Gardiner draws particular attention to reforms in peripheral Europe and improvements in the financial conditions in European banks as vital support to the market outperformance.
He says: “Reforms are taking place where needed – Spain has started to see the benefits – and while the political headwinds may prove challenging, the key players have shown their commitment.
“This will not stop European sovereign and credit markets being buffeted by the Fed’s tapering, but we think they can outperform their peers in a difficult global fixed income market.”
Hints from the European Central Bank that monetary policy looks set to “remain accommodative” despite signs of recovery also suggests that Europe can continue its run of outperformance, adds Gardiner.
Earnings for the “champion” European banks for the second quarter of this year show improved profitability, asset quality and capital levels, according to the CIO.
He also argues that peripheral banks “are on the right path”, although a “notable” divergence still exists here between the core and peripheral Europe.
Gardiner does acknowledge that Moody’s sees higher defaults in Europe compared to the US, but describes the difference as “modest”. He adds: “Forecasts suggest that this differentiation will continue, but not move higher. Importantly, it remains far below the 14 per cent default rate in the aftermath of the crisis.”
Barclays Wealth remain overweight Europe within fixed income, while the growing high yield market in the region has also prompted Gardiner to favour European over US high yield.
Elsewhere, signs that credit spreads have the “capacity to tighten from here” could also see the addition of positions on corrections.