A look at… Echiquier Credit SRI Europe | February 2025
Uriel Saragusti, Fund Manager of Echiquier Credit SRI Europe, La Financière de l’Échiquier (LFDE)
Strong momentum in the world of bonds continued in 2024, with a record issuance volume and sustained demand for the asset class. This supply/demand balance provided the backdrop for performance remaining strongly positive for investment grade debt[1] – rated AAA to BBB – and especially so for the high-yield segment[2]; this translated into a rise of 4.5% for your fund in 2024[3]. Despite this rise, the bond segment still has an attractive yield and there is room for a further rise should the fall in rates accelerate.
TRANSACTIONS
2024 bond issues reached a new record high in Europe, exceeding the 2020 level. Companies had to adjust to this new paradigm. The double inflation shock triggered by the Covid-19 crisis and exacerbated by the war in the Ukraine was not without consequences for corporate financing costs. Having been used to financing rates of between -1% and +2%[4] for a long time, eurozone treasury departments have had to accept paying in the region of 3% to 4%.
The “key rates” of the European Central Bank (ECB) warrant their name: their increase from -0.5% in 2021 to 4% in 2024 has been the main factor in this upheaval. These changes had a clear impact on volatility in the bond market, which had to significantly recalibrate its expectations several times during the period. At present, the market expects three rate cuts for 2025, which in light of the many challenges facing the eurozone does not seem overoptimistic.
The high yield segment has had a remarkable run since the last period of pressure in Q3 2023, with a tightening of risk premiums from 430 to 289 basis points currently[5]. A fall in the return consistent with the easing in inflation and energy costs and the start of interest rate cuts. The reopening of the primary market[6] in 2024 allowed numerous issuers to refinance and push the wall of debt further out, thus lifting the significant uncertainty that was looming on the horizon. For more than a year now,[7] high yield risk premiums have been becalmed, anchored at around 300 basis points[8] and with little sensitivity to the ups and downs in equity markets. The risk taken thus correctly remunerates a benign base-case scenario, but any deviation could be damaging.
INVESTMENT STRATEGY
In 2024, Echiquier Credit SRI Europe added depth to the strategic axes of its allocation, whose direction was defined in mid-2023.
The first axis is to lighten risk assets – high yield and subordinated debt – which are now close to 20% of the fund, a historic low and clearly below the maximum authorised level. The fund still has the potential to raise its high risk exposure once risk premiums become attractive again.
The second axis is reflected in lengthening maturities[9] in the investment grade allocation. Indeed, at the end of January 2025, the fund’s modified duration was 4.6, close to its all-time highs. The convergence of eurozone inflation towards the ECB target seems well under way. In conjunction with growth forecasts that are being consistently trimmed, this should allow for further easing in monetary policy. This scenario would be positive for long-dated bond assets with a low theoretical risk of default.