2025, last stop to catch the Fixed Income train?
26 DEC, 2024
Stanislas de Bailliencourt, Head of Asset Allocation and Fixed Income, Sycomore AM (part of Generali Investments)
After a very sharp recovery in 2023, credit has performed strongly in 2024, on the back of robust corporate profitability. Companies’ fundamentals remain resilient in a subdued growth context and default rates are still relatively low. Going forward, despite geopolitical tensions and a sluggish economic growth, we see no signs of a significant deterioration in credit risk.
Now that the inflation peak is behind us, central banks are entering an easing cycle with greater visibility in the eurozone, and rates have started to adjust downwards. We believe that in the years to come, rates are likely to continue to decrease progressively.
Thanks to the combination of rates and spreads, the lower ranges of the investment grade segment (BBB) and the higher range of the high yield segment (BB) are still currently offering an attractive yield profile. As deposit rates from the ECB are declining sharply from their peak at 4% during the first half of 2024, we consider this to be an opportunity for investors to switch to fixed income credit strategies to keep generating attractive returns while cash yields are set to fall rapidly.
2023 and 2024 were particularly favourable years for increasing investments into fixed income credit and we consider 2025 could be the last stretch of this window of opportunity for investing in corporate bonds.
We see responsible credit as a particularly rich vein of opportunities within the segment, particularly those transitioning to more sustainable practices. Year after year, we see a growing commitment from issuers to improve their ESG profiles and the trend is expected to continue in 2025. Article 9 funds which invest in companies involved in the ecological are a good alternative to seize these opportunities in the SRI credit universe.
At Sycomore Asset Management, we are proactively assessing sustainability-linked bonds (SLBs) as well as environmental impact bonds and increasing our investments in our different strategies. Increasing pressure on the auto sector due to potential tariff risk as well as a decrease in demand globally could provide attractive investment opportunities in companies offering mobility solutions or products with a positive environmental impact.
In the current central bank easing cycle, with corporate bonds still delivering attractive yields, we believe the trend observed in the last two years of increasing allocation to corporate credit should continue in 2025. It is also important to bear in mind that primary markets are very dynamic, offering both a wide range of investment opportunities and attractive premiums with a growing alignment with ESG targets.
