Monthly Commentary August

GAM Star Credit Opportunities (EUR)

The month of August was strong, as we saw most assets classes advance strongly. However, spreads within our securities remain extremely attractive. With spreads around 550 bps, valuations are still close to more than two times wider than where spreads were in February. Moreover, the continuation of strong fiscal support combined with Central Bank easing should be extremely supportive for the valuation of our securities. We are coming to the end of Q2 earnings season and results have remained very strong from a credit perspective; banks and insurance companies have demonstrated resilience, especially among the national champions. Despite loan loss provisions linked to Covid increasing significantly, most of the banks have reported higher capital ratios, as profits before provisions remain elevated. Combined with regulatory relief measures, it means that banks’ capital cushions have increased in Q2, which is a positive for bondholders. The Bank of England also released its August Financial Stability report, where it reiterated that UK banks have sufficient capital to absorb losses arising from Covid-19. Moreover, they believe credit losses should be smaller than the levels they had originally anticipated in May. We do expect prices to continue to recover as the uncertainty raised by the Covid-19 outbreak slowly fades away.

GAM Star Credit Opportunities (GBP)

The month of August was strong, as we saw most assets classes advance strongly. However, spreads within our securities remain attractive. With spreads around 540 bps, valuations are still significantly wider than where spreads were in February. Moreover, the continuation of strong fiscal support combined with Central Bank easing should be extremely supportive for the valuation of our securities. We are coming to the end of Q2 earnings season and results have remained very strong from a credit perspective; banks and insurance companies have demonstrated resilience, especially among the national champions. Despite loan loss provisions linked to Covid increasing significantly, most of the banks have reported higher capital ratios, as profits before provisions remain elevated. Combined with regulatory relief measures it means that banks’ capital cushions have increased in Q2, which is a positive for bondholders. The Bank of England also released its August Financial Stability report, where it reiterated that UK banks have sufficient capital to absorb losses arising from Covid-19. Moreover, they believe credit losses should be smaller than the levels they had originally anticipated in May. We do expect prices to continue to recover as the uncertainty raised by the Covid-19 outbreak slowly fades away.

GAM Star Credit Opportunities (USD)

The month of August was strong, as we saw most assets classes advance strongly. However, spreads within our securities remain extremely attractive. With spreads around 420 bps, valuations are still significantly wider than where spreads were in February. Moreover, the continuation of strong fiscal support combined with Central Bank easing should be extremely supportive for the valuation of our securities. We are coming to the end of Q2 earnings season and results have remained very strong from a credit perspective; banks and insurance companies have demonstrated resilience, especially among the national champions. Despite loan loss provisions linked to Covid increasing significantly, most of the banks have reported higher capital ratios, as profits before provisions remain elevated. Combined with regulatory relief measures it means that banks’ capital cushions have increased in Q2, which is a positive for bondholders. The Bank of England also released its August Financial Stability report, where it reiterated that UK banks have sufficient capital to absorb losses arising from Covid-19. Moreover, they believe credit losses should be smaller than the levels they had originally anticipated in May. We do expect prices to continue to recover as the uncertainty raised by the Covid-19 outbreak slowly fades away.

Spotlight: European Financials: showing resilience

Despite a challenging first half of the year, Atlanticomnium’s Romain Miginiac says European banks and insurers have shown resilience and balance sheets remain rock solid. Meanwhile, pressure on the sector is gradually alleviating.

Following our article on banks’ Q1 2020 results, second quarter results have confirmed that Covid-19 is an earnings story rather than a balance sheet story. With greater visibility on the macro outlook and with many issuers having frontloaded Covid-19 related impacts, we believe the sector has reached the inflection point as the bulk of the negative hit has been taken. From a credit perspective, the resilient solvency of the financial sector and its ability to absorb negative effects from Covid-19 through earnings remains the cornerstone of our bullish view on the subordinated debt of financials. Regulators also share the view, with recent European Central Bank (ECB) analysis emphasising the resilience of the sector during this real life stress test.

 

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