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Whilst fixed income portfolios have had a tough year, everything is relative. When it comes to fixed income asset allocation, that is often measured by the z-score. And as things stand today, this metric is leading both US and European investors to look closely at European Investment Grade Credit.
This comes at a time when the ECB has pushed out another rate rise at its March meeting. This was in line with market expectations. But the new dovish tone in delivery has the market believing the second half of 2023 may be brighter. The path to which require smaller rate rise steps. Followed by a pause ahead of peak inflation to accommodate the impact lag of tightening, and therefore reduce any unnecessary burden on the economy.
In other words, fixed income manager selectors are interested in allocating more to European Investment Grade Credit today, but are being selective on the managers they talk to. And in particular, focusing on the managers that can deliver high quality credit portfolios, with the highest spreads for the lowest default risk as the recession creeps in.
But differentiating the European Investment Grade Universe of Investment Managers is not easy. Par for manager selectors is often equivalent to enough alpha to cover the management fees. But in today's market, the opportunity to generate even more alpha is becoming seductive, necessary, but also possible - depending on the investment managers you find.
At this stage in the credit cycle, sector dispersion is large. And with so many unknowns ahead, that cross-sector relative value may grow wider. And even more so across the issuers within the sectors themselves. Deep credit research and selectivity are always important at every stage of the cycle. But not necessarily for the same reasons. Todays those reasons are clear. Risk mitigation and alpha maximisation.
