“The real drivers of bond markets are expectations of growth and inflation. In Europe there is the risk of higher growth, as well as the risk of deflation being priced out while the risk of some inflation is priced back in. So while the economic fundamentals are negative and government bond yields are still at relatively low levels, conversely it is more supportive for a better earnings picture in European high-yield,” Gartside added.
Another manager who is also optimistic on European high-yield is John Husselbee, head of multi-asset at Liontrust Asset Management.
His medium-risk portfolio holds a 33% bond weighting – 12% high-yield against 6% sovereign bonds – which he accesses via the Axa US Short Duration High Yield Bond and L&G High Income funds.
“High-yield – particularly the short end – has been doing quite well,” he said. “We like high-yield – it should get the yield compression driven by the Greek default risk, and we are overweight in it.
“The Greece risk is priced into the market. On one side, debt has moved away from the hands of European banks into the ECB, IMF and Greek banks, so any default or exit is going to hurt the Greeks more than it will the eurozone. But on the other side, there is obviously the contagion effect and precedent that sets,” Husselbee said.
“I am expecting volatility in the market, which give an opportunity to add value on both the allocation and fund manager levels,” he added. “We have been going through a period of maybe too-low volatility, so to some extent it will be welcomed. That said, it does need to be managed as well.”
