Close your eyes and buy

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Search for yield

For Europe, the technically driven credit-supportive environment continues to persist thanks to the
ECB’s pledge to grow its balance sheet substantially. At the same time, in the US business and credit
cycles are already at a more advanced stage. This leads to higher leverage of corporate balance
sheets, and this is not limited to the US alone. Still, Central Bank purchasing is the dominant factor
that supports asset prices. Even with the Fed withdrawing, on an aggregate level global central banks
still inject more liquidity. The party is not over yet. We stick to long positions for investment grade and
have also moved to long beta for high yield after the sell-off this summer. For emerging corporates
we are a bit more conservative and keep the beta close to neutral.

As seasoned credit investors it is in our genes to scrutinize our investments and avoid downside risk by
nature. Credit is about avoiding losers, not picking the winners. This attitude is still the right one to
pursue and will generate superior returns through the cycle. This year however, it is not credit
fundamentals that matter. It is all about central bank policy. As a rising tide lifts all boats, central
bank liquidity injections are supporting all financial assets, from risk-free Treasuries to stocks.

Volatility is compressed and issuer dispersion is very limited. This year you should have closed your
eyes and bought almost everything. Although it is by no means our intention to advocate reckless
investment strategies, we believe it is smart to realize how important this technical factor still is.
Without neglecting our thorough issuer screening, we think it is wise to benefit from this technical by
positioning the portfolios with betas that are above 1.

Below trend growth

The US is the only region that is growing at a satisfying rate although it is still not enough to close its
output gap or push up inflation. Europe is struggling and China’s only way to keep growing is by
injecting more debt into an already dangerously levered system. Japan is facing its own problems.
The end result is that central banks have taken over and inject an unprecedented amount of liquidity
into our world. And still growth remains subdued. As a result of the financial crisis the private sector,
in particular households, has become reluctant to borrow.

Central banks: unconventional measures

Central banks continue to pursue unconventional policies. It remains to be seen what the
consequences are of a reversal of such policies. At this moment the only consequence is that quality
yields are driven into negative territory and that the search for yield goes full speed ahead. Close your
eyes….