Time to turn negative on European credit, says BCA Research By Investing.com

Investing.com — BCA Research issued a cautionary note on the outlook for European credit markets in a note on Tuesday, telling investors it’s time to turn negative on the asset class.

Analysts say European credit spreads have “little room to narrow further from current levels”, leaving investors undercompensated for the growing risk of a recession that could materialize later this year or early of 2025.

A key concern highlighted by BCA Research is the impact of future interest rate cuts by the European Central Bank (ECB).

Contrary to the typical market optimism associated with rate cuts, the BCA warns that these cuts “should not be seen as positive for credit” as they are likely to coincide with “darker days ahead for markets”.

Another critical issue is the so-called “maturity wall”, referring to the significant short-term refinancing needs faced by European companies.

According to the BCA, this will increase borrowing costs, leading to a “further deterioration of corporate balance sheets”, particularly for high yield (HY) issuers.

This deterioration, combined with already strained balance sheets, is said to raise the prospect of more defaults in the coming months.

BCA’s models suggest that European high-yield credit is currently “expensive”, further supporting their negative outlook.

As a result, BCA Research recommends that investors prefer higher quality assets in their fixed income portfolios and continue to favor sovereign bonds over corporate credit.

“The speculative default rate will increase over the next 12 months. Within fixed income portfolios, we continue to recommend that investors prefer sovereign bonds over credit,” the BCA concluded.