- Correlations between defaults and macroeconomic variables suggest European defaults may rise above 8% in the months to come. However, both monetary and fiscal support are set to contain the impact to a much more moderate 5-6% peak in H1 2021 in our view.
- Rating agencies have also factored in this policy support but they will, of course, continue to closely monitor the credit quality of European issuers. We deem the rating migration risk now more serious for IG and BBB in particular, while HY has already suffered from the bulk of the downgrades since the global spreading of Covid-19.
- Hence within the crossover space, we think investment opportunities can be found in fallen Angels that are already pricing in a downgrade to high yield and in solid BBs and Bs. HY appears hard to avoid over the medium term but credit selection is key as idiosyncratic risk will remain elevated. We also continue to favour subordination risk to credit risk.