00:00It's been an incredibly strong start to the year for credit.
00:03Is there a danger now that it's not going to take very much to slow it down,
00:08to get people maybe to back off and maybe Trump tariffs threats would be enough maybe to do that?
00:15Well, I think we've got to remember that in credit you are not relying on abundant growth,
00:20that there's plenty of places which can withstand a slight economic deterioration out there.
00:25So the credit investor is really looking for good balance sheets,
00:30good cash flow generating companies which can support the current yield
00:35and it really becomes this year about a current yield play return.
00:40And as long as your companies can pay their coupon
00:41and you can find the right places to invest without reliance on abundant growth
00:45and can withstand a lot of pressure,
00:47then we should be able to assemble that portfolio which looks pretty robust.
00:50Are there plenty of options out there to do that, are there?
00:52There are, there are.
00:53I think in the past year or so you've seen the more exposed end of the market,
01:00the chemicals, the autos which you referred to before,
01:02they have widened out and they're already at wide levels
01:04and so maybe they could widen out a bit further
01:07but they're pricing already quite difficult structural issues in those markets
01:11and construction may be another part of the market which has been more suppressed.
01:18So I think there is a bit of pricing already in there
01:20but we don't, you know, we don't see the reaction which has been fairly benign today
01:25in credit as being misplaced because I do think in amongst all of the
01:30many companies you can invest in, there's lots and lots which can withstand the pressure
01:35as we saw last year when, you know, through the Liberation Day crisis,
01:38there was still a lot of very well supported companies in the credit market.
01:41There has been a trend recently of people moving money out of the United States back into Europe.
01:46Yeah.
01:47The situation looks like it could only accelerate, re-accelerate that move.
01:51Is that, would that be your view as well?
01:53I think so.
01:54I think we started to hear more and more last year investors looking at their portfolios
01:58and thinking they were over-indexed, particularly to the US dollar and looking at alternatives.
02:03And, you know, slowly, slowly those conversations have increased and money has started to move
02:10and find different places to invest.
02:12And in amongst all those alternatives, Europe presents a very liquid market,
02:17very understandable market, established for many years,
02:20somewhere where the rule of law, the basics around lending look well supported.
02:25And so the alternative for Europe is pretty strong.
02:28Also, the yield context where we can pick up a little bit more yield,
02:32perhaps policymaking is less erratic or maybe more irrational around monetary policy,
02:40that could help play into that market as well.
02:43You told me kind of some areas you think that have widened out a lot.
02:47Are there any areas that you think are too tight now?
02:50If we're seeing a widening out in chemicals and autos for some of the structural reasons
02:54you've highlighted, plus also you throw in the tariff story,
02:56maybe that becomes even more understandable.
02:59But is there any areas you think that have got too tight that you'd be avoiding right now?
03:03Well, what we have talked about internally is mainly, you know,
03:08this is not a time to reach around the edges.
03:11Right.
03:11That, you know, playing a diversified portfolio of assets,
03:15which you think should produce that cash flow return to support the coupon,
03:19is the right way to do it.
03:20There is no time to be a hero around the edges.
03:23Having said that, within some of that cyclical, challenged end of the market,
03:29the most important thing is to look at the balance sheets and the liquidity.
03:33And if they have a good, strong balance sheet and lots of liquidity to withstand all the noise around them,
03:38there are still places which can set you apart as a manager and as a team of credit selectors,
03:44which could play into your overall position.
03:47Has that not been there for the last few years?
03:48It has. It has. But, you know, what you've seen is a real bifurcation,
03:54an increasingly bifurcated market, where there's one performing end,
03:58which is the vast majority of the market performing,
04:01very tight spreads because they are good quality assets which show very little vulnerability.
04:06And the demand is there to support that.
04:09And then you've got a big gap between the other end of the market,
04:12which predominantly is around autos and chemicals and cyclical names
04:16and idiosyncratic over-levered balance sheets in that end of the market,
04:20which, you know, if you are selective, may produce some fruitful outcomes.
04:25But in the main, we are favouring up in quality and favouring diversification.
04:30But you think you can deliver even in...
04:32So if Europe has no growth this year,
04:34you think that you can build a credit portfolio that can work around,
04:38that can deliver in that kind of environment?
04:39Yes.
04:40If we see growth suffering, are we going to see even more dispersion?
04:46Well, you should, but there's a point where quite a lot of that is priced in.
04:53But the way we piece together the portfolios is just...
04:57Most credit managers are stress-testing those cash flows for economic deterioration.
05:03And if you can still see companies with a very good cushion
05:06to withstand increased pressure on that or another year of slow growth,
05:11another year of perhaps moving maybe beyond that into declining growth,
05:16if you can still withstand that on your cash generation,
05:18that's the beauty of being in credit as opposed to equities.
05:21It's just supporting your coupon payment is the name of the game.
05:25There appears to be a re-acceleration story that's emerging in the United States.
05:29Is that going to pull money in, do you think?
05:31How does that affect what you do in Europe in terms of where money gets allocated towards?
05:37You're seeing an expectation that maybe the US economy re-excelotes over the next six months.
05:43Is that a better environment for credit investors to be in than, say, a flat growth story here in Europe?
05:48You know, not necessarily.
05:50There's no definitive prize for the credit investor to have overachieving on growth
05:58because you're going to get your coupon, you get your principal back.
06:02Maybe in the dislocation end of the market you might get the pull to par.
06:06But you shouldn't overreach in credit because the upside is only so much,
06:12but the downside could be quite considerable if you've got something wrong.
06:15So I wouldn't say that, but actually I think sometimes pockets of markets being unnerved
06:22are quite helpful to prevent, which is the worst thing for credit,
06:27which is an over-enthusiastic market, which is aggressively lending, supporting bad quality.
06:31You don't think we're there at the moment?
06:33No, I don't.
06:33The start of this year has been extraordinary in terms of some of the issues.
06:37Yes, but I think there's still credit standards are quite careful about where we're underwriting.
06:41You haven't seen that many CCC investors, issuers.
06:45You haven't seen that many unsecureds.
06:47I think the broadly syndicated loan market, higher bond market in Europe
06:51has never got into that real exuberant phase.
06:55Now, you can argue about where spreads are, but in terms of quality of risk,
06:59in terms of quality of underwriting, I haven't seen that kind of scary level of deterioration
07:05because the market has got so hot and it's going to underwrite anything.
07:08Because we've had, after COVID, Ukraine invasion, the LDI, the Trump tariffs,
07:14it just never entered that phase where it's just had a long streak of relaxation.
07:18Does that imply that credit spreads could get tighter?
07:22It could.
07:24There's nothing, there's no reason if the demand is there that it couldn't go tighter.
07:30I think that's a fair assumption.
07:32But your assessment would be quite tight now, but could get better?
07:35It could do, yeah.
07:37It could do.
07:38If the demand is there, the other thing that could support it
07:42is that the supply has been fairly muted for quite some time.
07:49In European high-year bonds, in European loans, the demand is ahead of the supply.
07:53Unless you saw that really come on in strength, I think the technical supports demand for the asset class still.
08:02In terms of where the requirement is, clearly we're seeing defence companies needing to gear up quite significantly.
08:09Some of the industrials around them needing to gear up quite significantly.
08:12There are key areas you're watching in 2026 in terms of where you think there could be quite an interesting cycle.
08:21I get a really big upswing.
08:22The defence has been going for a while now, but if we're going to rearm Europe at the kind of pace that people are talking about,
08:28there's going to be a requirement to gear some of that up.
08:31Yes, I think the defence is interesting, but it's quite a small component of our market.
08:36So I think when it gets more fruitful for us is when you start to see more infrastructure spending,
08:41and particularly construction.
08:43If we start to see a turn in the construction market,
08:45there are some positive indicators building and assuming this doesn't get offset by the tariff noise we're getting now,
08:56or the geopolitical environment, that could build as quite a positive backdrop for Europe.
09:02And certainly we're watching that very, very closely because that has a much broader impact across what we see we can invest in.
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