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Italian corporates “relatively resilient”

Face_maskBond managers in Europe are digesting the impact of the coronavirus outbreak in Italy, where the government bonds market has seen significant buying in recent months. Spreads on derivatives that provide insurance against Italy defaulting on its debts have moved since cases of coronavirus were reported in the country - but the move is described as “logical” and the market continues to buy Italian government bonds. Tim Graf, head of macro strategy in Europe, Middle East and Africa at State Street, says investors have continued to buy Italian government bonds – or ‘BTPs’ - despite coronavirus headwinds and that the 10-basis-points wider spreads on certain credit default swaps was a natural response to risk. “It stands to reason that fears of the virus spreading to a European country would require some re-pricing, though the market momentum has also been very strong into BTPs of late. So, it’s likely that is as much a reversal of that recent trend as it is a repricing. Even so, it is not a dramatic re-pricing of credit, just building a risk factor in that wasn’t there before.” Five-year Italy CDS spreads have tightened more than 60 bps over the last year, which Graf says suggests the recent 10 bps move is only a “small retracement of a much bigger move”. Meanwhile, Italian corporate bonds should be “relatively resilient” to the coronavirus outbreak, with Italian press and economists forecasting a 0.2% effect on GDP and “minimal effect” for European GDP, according to a fund manager at Vontobel Asset Management. Mondher Bettaieb-Loriot, head of corporate bonds at the firm, said the large Italian corporates prevalent in credit indices are either banks, utilities and telecom companies. “All of these are essentially domestically oriented and non-cyclical, and are therefore less likely to suffer,” said the fund manager. “They are also very profitable and the demand for their products should therefore hold.” “It is interesting to note that when compared to normal Influenza statistics, the number of positive cases usually increase towards the end of February to peak in March and recede in April. Therefore, this can be used as a road map and would reinforce the temporary nature of this episode in Italy.” Should this happen, and given that credit ratings are medium-term oriented, says Bettaieb-Loriot, “we do not believe that this incidence would have any impact on longer term ratings at Italian corporates as the agencies typically award ratings through cycles”. Bettaieb-Loriot has no plans to increase or decrease Italian corporate exposure and portfolio holding include Assicurazioni Generali, Mediobanca, Unicredito, Intesa SanPaolo, Enel, and Telecom Italia. Also, the European Central Bank should have no further need to relax monetary policy on this “temporary episode” as are is already “very strong and sufficient stimulus packages”. © 2020 funds global asia

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