European High Yields? Stay bullish, here’s why

It does not look like the better time to invest on the high yields. The markets are in a strong risk-aversion mood. But Peter Aspbury, JP Morgan AM portfolio manager, is still bullish on the asset class, as long as it is made in Europe.

More than one reason keeps aloft the interest for European high yields. At least in Peter Aspbury mind. JP Morgan AM’s portfolio manager states in a report that “the credit clock is still favourable in Europe.European high yields stands to benefit from the ongoing improvement in the European corporate earnings and minimal exposure to the struggling energy and metals & mining sectors”. That very sectors that hampers the road for the US high yields. Moreover, in a vows of faith in European banking system, Aspbury believe that “European banks continue to restructure with bank lending conditions easing and demand for bank loans increasing”. And last but not least “the Fed has begun its long-awaited tightening cycle while European monetary policy continues to loosen”. 
“The credit quality – keeps on saying Apsbury – of new debt issuance has been solid and European high yield default rates remain very low meaning investors are well compensated for buying riskier credit. European HY defaults averaged below 1% in 2015 and we’d expect that rate to remain comfortably below 2% throughout 2016, a level which is already priced into the market”.
The comparison with the US market is winning: “It may be easy for investors to look at the yields on US junk bonds and assume the asset class is cheaper there, but headline figures mask the US market’s lower average ratings quality, higher underlying risk-free yields, and longer weighted average duration. Adjusted for these factors, we think that credit spreads in Europe are actually cheaper than the US. On a standalone basis, current spreads are in the first quartile in terms of historical valuations (based on a daily spread history going back to 2002). In other words they have only been this cheap or cheaper 25% of the time despite being in the current environment of attractive fundamentals. In fact the last time that spreads were so wide, we were in the midst of a Greek sovereign default and an unresolved Eurozone banking