Credit opportunities
December 2024
- There is an opportunity for investors to capture returns from high-yielding European subordinated debt
- Our active management approach enables us to capitalise on favourable pricing anomalies
- The fundamentals of the European financial sector remain robust
1. What do you think could be the biggest challenge or opportunity for clients in 2025?
In 2025, the biggest opportunity for investors lies in capturing returns from high-yielding European subordinated debt, especially given favourable conditions in the European credit market. Elevated yield levels in subordinated debt, coupled with expected central bank rate cuts, provide potential for capital gains and attractive income. However, the primary challenge will be navigating potential geopolitical volatility, which can impact credit markets. By actively managing allocations and seizing mispricing opportunities as they arise, investors can capitalise on both steady income and market fluctuations.
2. What do you see as the one major investment opportunity for you in 2025 and how can you capitalise on it?
In 2025, subordinated debt stands out as a prime investment opportunity, driven by the robust fundamentals of the European financial sector and strong market appetite for high-yielding instruments. With yields around 6.5%, we think subordinated debt offers a compelling carry, particularly from top-tier investment-grade issuers and national champions. By focusing on these stable, high-quality names, we aim to deliver attractive income with the potential for price gains as spreads normalise. Our active management approach further enables us to capitalise on favourable pricing anomalies.
3. What is the biggest risk to your asset class next year and how can you mitigate that risk, or even turn it into an advantage?
The biggest risk in 2025 is the potential mispricing of extension risk within Additional Tier 1 (AT1) contingent convertible bonds (CoCos), exacerbated by market volatility. To mitigate this, we employ a quantitative approach to assess extension risk and actively adjust our allocations, favouring securities likely to perform well under different stress scenarios. By doing so, we can not only reduce volatility but also take advantage of temporary mispricing. This disciplined approach allows us to capture attractive income while positioning for future appreciation as these bonds reprice toward their call dates.
Gregoire Mivelaz co-manages the Credit Opportunities and Climate Bond strategies at GAM Investments.
Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio nor represent any recommendations by the portfolio managers nor a guarantee that objectives will be realized.
This material contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio nor represent any recommendations by the portfolio managers nor a guarantee that objectives will be realized.
This material contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.