Context: Different Interest rates levels and valuations of EUR vs USD sub debt result in an outperformance of the USD fund over the EUR fund
Impact for the fund:The USD fund outperforming EUR fund by 1.5% – 2% per annuum
The difference in performance between EUR and USD fund is mainly due to two key drivers: difference in income & valuations
What catalyst could make spreads for EUR securities converge toward USD one (i.e. which would mean EUR fund outperforming USD fund)? We feel that with Trade war concerns receded (Phase 1 deal signed) – economic activity is likely to pick up and PMIs (especially that of export-oriented economies such as Germany) are poised to improved, indicating a cyclical recovery for the Eurozone. In our view this would lead to EUR-denominated subordinated debt outperforming.
As an example, in 2017 – the EUR fund outperformed the USD fund (see chart below) despite lower income yields in EUR, reflecting the outperformance of EUR-denominated sub debt.
This was driven by an improving macro picture – with a strong improvement in manufacturing PMIs and GDP growth rising to 2.5%.