The significant market dislocations during the first half of 2022 suggest that there is a case for moving back into investment grade euro credit. Year-to-date flows have shown that investors are returning into this asset class via ESG-screened exposures and we believe this trend could continue in the coming months.
After the substantial first-half sell-off, are there signs that investors may once again be warming to investment grade credit? The first half of 2022 was not a happy one for credit investors. The combination of rising government yields, as central banks tightened policy, and the decompression of credit spreads from historically tight levels produced both the worst (Q2 2022) and third worst (Q1 2022) quarters for returns for euro investment grade (IG) credit since the year 2000.1
As we can see in the investment flows section of the latest Bond Compass, investors reacted by lightening exposure and now look underweight in euro high grade credit in particular. The chart in the Bond Compass that illustrates the timeline of flows, “Keeping it Safe in Credit,” shows flows for euro investment grade credit fell close to zero for much of H1 2022, indicating the weakest inflows during the past five years.
A part of the widening in credit spread was directional, with the rising bond yields alleviating the necessity for investors to assume additional credit risk in order to lock in reasonable yields. The ECB stepping away from the market has also been a factor, resulting in lower levels of liquidity in the euro credit market. The other issue is fear over a recession, with cuts to European energy supplies a clear economic threat.
All that acknowledged, the widening of euro credit spreads has been aggressive. Option-adjusted spreads on the Bloomberg Euro Aggregate: Corporates Index have pushed out well beyond those seen during the 2018 Fed cycle and are almost as wide as the level reached in the COVID-induced market disruption. Despite the July rebound, both spreads and yields remain at their widest since September 2012, if the COVID spike is excluded. So there appears to be a significant amount of bad economic news in the price. This is not yet reflected at a corporate level, with the upgrades/downgrades ratings ratio remaining above one for European IG issuers for both Moody’s and S&P.2
There are indeed hints that these higher yields and the aggressive nature of the H1 sell-off are enticing investors back into the market. The first three weeks of July saw positive inflows into euro-denominated IG ETFs.3
Another question for credit investors, which came to the fore during the first half of the year, is the degree to which ESG strategies could be expected to outperform market-weighted benchmarks. High energy prices clearly leave energy-light strategies at a disadvantage. Moreover, with oil and gas prices expected to remain high for the foreseeable future, there are concerns that investors may desert ESG. There is little evidence of this within the ETF ecosystem, however, and we have actually seen the opposite. Figure 1 illustrates that, in the European ETF space, the preference for ESG strategies remains undimmed.
The big exodus from credit generally has impacted ESG-focused ETFs far less than those that track vanilla, market-weighted benchmarks. Cumulative net flows turned negative during just three weeks in February. In contrast, non-ESG ETF flows have been in negative territory for most of the year to date.
In 13 of the weeks, there were outflows from market-weighted strategies but inflows into ESG ones.
The last three weeks show investors returning to IG credit generally but with a preference for ESG strategies.
Flows may in part be driven by European legislation pushing money toward greener strategies, but there is also little evidence of widespread underperformance as a result of underweight energy positions. Figure 2 shows the H1 2022 sector performance for the Bloomberg Euro Aggregate Corporates Index. The top-performing sectors were banking, staples retail, consumer discretionary and tech bonds, while the bottom-performing sectors were real estate, renewable energy, utilities and discretionary retail. ESG strategies are typically overweight the banking and tech sectors. Energy sectors actually performed poorly. There may also be some additional benefits in the form of reduced volatility. For instance, the Bloomberg SASB Euro Corporate ESG Ex Controversies Select Index has seen more than 3.5% less volatility than the parent Bloomberg Euro Aggregate Corporates Index during the past five years.4
Figure 2: Sector Performance within the Bloomberg Euro Aggregate Corporates Index (H1 2022)
How to Access this Theme
Investors who are looking to invest in ESG-screened, euro IG credit can do so with SPDR ETFs. To learn more about these ETFs, and to view full performance histories, please visit the fund pages linked below.
1 Based off quarterly returns from the Bloomberg Euro Aggregate Corporates index – Source Bloomberg Finance L.P. as of 28 July 2022
2 Source: Bloomberg Finance L.P., as of 28 July 2022.
3 Source: State Street Global Advisors, Bloomberg Finance L.P., as of 22 July 2022. The universe is composed of 101 ETFs (including shareclasses) domiciled in EMEA with an IG corporate credit focus.
4 Source: State Street Global Advisors, Bloomberg Finance L.P., as of 30 June 2022.
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ETF's worden verhandeld zoals aandelen, zijn onderhevig aan beleggingsrisico, fluctueren in marktwaarde en kunnen worden verhandeld tegen prijzen boven of onder de netto-inventariswaarde van de ETF’s. Brokercommissies en kosten van de ETF zullen het rendement verminderen. De wijzigingen in wisselkoersen kunnen een nadelig effect hebben op de waarde, prijs of inkomsten van een belegging. Verder is er geen garantie dat een ETF zijn beleggingsdoelstellingen zal behalen.
DE SPDR-ETF'S VAN SSGA ZIJN MOGELIJK NIET BESCHIKBAAR OF GESCHIKT VOOR U. DE UITGEDRUKTE MENINGEN/INFORMATIE OP DEZE SITE VORMEN GEEN BELEGGINGSADVIES, FINANCIEEL, JURIDISCH, REGLEMENTAIR, BOEKHOUDKUNDIG OF BELASTINGADVIES. BIJ TWIJFEL DIENT MEN STEEDS ONAFHANKELIJK ADVIES IN TE WINNEN. DE INFORMATIE NOCH ENIGE OPINIE OP DEZE SITE VORMT EEN VERZOEK OF AANBOD VOOR DE AAN- OF VERKOOP VAN AANDELEN VAN DE FONDSEN OF ENIG ANDER FINANCIEEL INSTRUMENT.Standard & Poor’s®, S&P® en SPDR® zijn gedeponeerde handelsmerken van Standard & Poor's Financial Services LLC (S&P); Dow Jones is een gedeponeerd handelsmerk van Dow Jones Trademark Holdings LLC (Dow Jones); en deze handelsmerken zijn in licentie gegeven voor gebruik door S&P Dow Jones Indices LLC (SPDJI) en in sublicentie voor bepaalde doeleinden door State Street Corporation. De financiële producten van State Street Corporation worden niet gesponsord, bekrachtigd, verkocht of gepromoot door SPDJI, Dow Jones, S&P, hun respectieve filialen en externe licentiegevers, en geen van deze partijen doen enige verklaring over de raadzaamheid om te beleggen in dergelijke producten, noch aanvaarden zij enige aansprakelijkheid in verband hiermee, inclusief voor fouten, weglatingen of onderbrekingen van een index.
SPDR-ETF's mogen enkel worden aangeboden en verkocht in rechtsgebieden waar dat is toegelaten in overeenstemming met de geldende regels.
Informatie met betrekking tot Mexico
Deze informatie is geen marketing of aanbieding van effecten en is niet ook niet zo bedoeld, en mag bijgevolg niet als dusdanig worden opgevat. De fondsen waarnaar in dit document wordt verwezen, zijn niet en zullen niet worden geregistreerd onder de Mexicaanse wet op de effectenmarkten (Ley del Mercado de Valores) en mogen in Mexico niet aan het publiek worden aangeboden of verkocht. De documentatie met bekendmakingen in verband met een van de bovengenoemde fondsen mag niet openbaar worden verspreid in Mexico en aandelen van de fondsen mogen niet worden verhandeld in Mexico.
SSGA SPDR ETFs Europe I Plc en SSGA SPDR ETFs Europe II Plc zijn beleggingsmaatschappijen met variabel kapitaal opgericht als fondsen met afzonderlijke aansprakelijkheid tussen de compartimenten volgens de wetten van Ierland en erkend door de Central Bank of Ireland conform de Europese verordening van 2011 over instellingen voor collectieve belegging in effecten. U moet het prospectus en de essentiële beleggersinformatie (KIID) met betrekking tot specifieke SPDR-ETF's aanvragen en zorgvuldig lezen alvorens u belegt. Voor meer informatie en het prospectus/KIID met de kenmerken, kosten en risico's van SPDR-ETF's kunt u nu een prospectus of KIID downloaden, of kunt u deze documenten verkrijgen bij uw financieel adviseur of bij uw lokale SSGA-kantoor.
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