Download the article here Download PDF

Olivier Videau

Head of Credit Insurance and Regulated Client Strategies AllianzGI

2022: credit or not?

Will 2022 be another strong year for credit?

After years of relative outperformance amid a general decline in interest rates, the return of inflation and the liquidity withdrawal announced by central banks present a serious obstacle. In an environment that remains relatively sound from a business fundamentals standpoint, the strategy’s cornerstone will be determining how much risk investors are willing to take on the fixed income portion of their insurance portfolio.

Finally, the much-awaited announcements from the European and US central banks in mid-December, which became a reality at the end of the year, helped eased pressure. The ECB has announced an easing of economic support, but plans to maintain its “safety nets”. It seeks to remain flexible in a shifting economic context marked by the Omicron variant and fears of continued inflation. An increase in interest rates would seem rather unlikely in Europe before Q4 2022, despite the Fed stating that it is prepared to consider four rate hikes before the end of the year. The ECB has confirmed that it will gradually bring an end to its pandemic emergency purchase programme (PEPP, currently representing an envelope of €1,850 billion) by March and it may adjust the CSPP, its other “traditional” purchase program, so as to avoid “weaning” the economy off too abruptly and risking a credit crunch. The “threat” of inflation is a factor to keep in mind, but to some extent central banks in Europe seem ready to accept the beneficial effect of inflation as a debt buffer, provided it does not exceed the 2% target for too long. AllianzGI expects 10-year yields to rise, both in the United States and Europe, and anticipates that this will weigh on the valuation of risky assets. We therefore envisage the possibility of spreads entering an initial decompression phase in anticipation of a rise in the Bund, making them more attractive again.

Whether intrinsic fixed income volatility persists (major fluctuations in the Bund) or is affected by external factors (pandemic, geopolitical crisis), it will require a certain amount of caution before offering an entry point into the market in the event of a clear divergence. In 2022 this volatility may also come from equities, the valuations of which – partly induced by very low yields – may be brought into question.

In terms of duration, we remain positioned at levels close to benchmark index and are ready to reconsider investing on the long side. Today, the proportion of shortterm credit offering negative returns has decreased compared with last year, while the long side faces a risk of spreads widening and the yield curve steepening. Moreover, we are waiting for volatility to ease a little before finding suitable entry points.

Due to volatility and a highly active primary market, we remain slightly overweight on credit and selective in our investments in the first quarter and are paying close attention to the risk of mergers and acquisitions as well as the carbon footprint of these companies. Our short-term view is that credit remains slightly positive as we enter the prepublication period, without any major concerns about the longevity of inflation, which we still consider to be “transitory”. A return to normal in global supply chains slowed by Omicron and a one-time impact of wage increases may disappoint during the corporate reporting period in the first half of the year but are not expected to materially impair credit agency ratings. Our medium-term view is slightly negative, with a scenario that does not include any major inflation-related surprises but does see the ECB preparing the market for rate hikes in Europe next year. After having undergone a phase of intermediate volatility, we may end the year with rates and spreads relatively close to what we are seeing today.

In terms of ratings, with the aim of maintaining some market exposure, we are overweight in investment grade BBB, and have maintained attractive high yield BB positions which offer a lower duration component and an attractive solvency capital return. From a sectoral standpoint, we maintain overexposure to financials, where banks – which are still well capitalised – should benefit from rising interest rates. We continue to invest in car manufacturers and their equipment suppliers, although we are somewhat more cautious about the more inflationsensitive sectors. We also continue to favour utilities that issue green bonds and – for the moment – issuers purchased by the ECB as part of its market support programme.

Finally, we think securities selection will be more important than positioning in relation to the credit market beta in 2022.

Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. Investing in fixed income instruments may expose investors to various risks, including but not limited to creditworthiness, interest rate, liquidity and restricted flexibility risks. Changes to the economic environment and market conditions may affect these risks, resulting in an adverse effect to the value of the investment. During periods of rising nominal interest rates, the values of fixed income instruments (including short positions with respect to fixed income instruments) are generally expected to decline. Conversely, during periods of declining interest rates, the values of these instruments are generally expected to rise. Liquidity risk may possibly delay or prevent account withdrawals or redemptions. Past performance is not a reliable indicator of future results. If the currency in which the past performance is displayed differs from the currency of the country in which the investor resides, then the investor should be aware that due to the exchange rate fluctuations the performance shown may be higher or lower if converted into the investor’s local currency. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer companies at the time of publication. The data used is derived from various sources, and assumed to be correct and reliable at the time of publication. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail. Information on Investor Rights in English are available here (www.regulatory.allianzgi.com). The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted; except for the case of explicit permission by Allianz Global Investors GmbH.

For investors in Europe (ex. Switzerland)
This is a marketing communication issued by Allianz Global Investors GmbH, www.allianzgi.com, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, 60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de). Allianz Global Investors GmbH has established branches in the United Kingdom, France, Italy, Spain, Luxembourg, Sweden, Belgium and the Netherlands. Contact details and information on the local regulation are available here (www.allianzgi.com/Info). Information on Investor Rights in English are available here (www.regulatory.allianzgi.com).

For investors in Switzerland
This is a marketing communication issued by Allianz Global Investors (Schweiz) AG, a 100% subsidiary of Allianz Global Investors GmbH.

2013264