SocGen Cautious On Bonds But Sees Value In US High Yield

Max Skjönsberg

3 July 2012

Despite the outperformance of credit markets this year, Societe Generale Private Banking is taking a cautious stance on bonds because of the eurozone crisis and slower global growth.

The increased stress levels in Europe, signs of slowdown in China and weaker economic data from the US have added to risk aversion and limited gains in global high yield, the French bank writes in its latest investment strategy update. SocGen views sovereign bonds and investment grade corporate debt as being very expensive already.

The bank is therefore largely on the sidelines of the sovereign bond market, with the exception of so-called "mid-core" European issuers such as France, Austria and Belgium.

At the same time, the bank says that corporate fundamentals and attractive valuations support a constructive view on high yield. The US market is to be preferred over Europe and Asia.

Meanwhile, SocGen is more upbeat about emerging markets compared to their mature counterparts. Along with most other risk assets, emerging markets have taken a beating since April, but after the significant correction of the last couple of months they now boast plenty of upside potential. Because of the volatility, however, investors need to tread with caution.

Equity markets across the board will be at the mercy of the outcome in Europe and volatility is to be expected over the next coming weeks, according to SocGen's forecast.

On the back of its ability to boost domestic demand, the bank singles out China as a preferred market. SocGen also highlights consumer spending vitality in the other BRIC countries, Brazil, Russia and India, making these markets less dependent on the global economy.