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1. What do you think will drive European credit performance in 2025?
The resilience of the US economy in 2024 stood out against the slower growth seen in the euro zone and China. Even so, European credit markets have shown robust technical support, driven by significant inflows into investment grade (IG) funds. According to JPMorgan, IG inflows reached a record 12.4% of assets under management in 2024. Valuations are tight, but spreads are still well-above their post-COVID lows, unlike in other markets. We think inflows will continue into 2025, though probably at a slower pace, as income-seeking investors find global credit attractive after years of suppressed yields.
2. What are the primary risks facing the European credit market?
Policy uncertainty looms large. Markets are grappling with the potential impact of a new US administration, particularly around tariffs and geopolitical tensions, which we believe could ripple through global trade and impact inflation dynamics. Direct exposure of European corporates to US tariffs appears manageable due to their smaller proportion of revenues tied to exported goods to the US (6.6%),[i] but certain sectors like luxury goods and autos are more vulnerable to weakening consumer demand in China.
Chart sources: LSEG Datastream, Bloomberg, Loomis Sayles, as of 24 January 2025.
The chart presented above is shown for illustrative purposes only.
Additionally, the European Central Bank’s accelerated quantitative tightening schedule for 2025 will increase corporate bond redemptions and is likely to put some pressure on liquidity, in our view. Redemptions are expected to rise from €2.6 billion to €3.6 billion per month, alongside the ending of reinvestments from the Pandemic Emergency Purchase Programme (PEPP), which we believe could add further strain. However, solid trading activity and tighter bid-ask spreads show that liquidity in the market is holding up well for now.
3. What is your view of valuations in the sector?
Valuations continue to paint a nuanced picture. Consensus expectations for 9% EPS growth in the euro area feels somewhat optimistic to us. With euro zone growth more likely to stay subdued in 2025, fundamentals remain mixed across sectors. Leverage in key industries such as basic materials and industrials is near the high end of historical ranges, while we expect utilities and oil & gas to benefit from their conservative capital allocation and recent energy price tailwinds. We believe valuations, though tight, offer relative appeal when considering issuer-specific, cross-currency and idiosyncratic opportunity. In our view, the current environment should favor high-quality names, particularly in sectors like financials.
[i] Source: Morgan Stanley, 2025 European Equities Outlook, published 17 November 2024.
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