Uncovering attractive credit opportunities in Europe

Following several turbulent years in European credit markets, bonds denominated in euros have new appeal, according to Fidelity's Michael Foggin.

• As the calendar turned to 2024, Fidelity Portfolio Manager Michael Foggin began to see a turning point for euro-denominated bonds, which, when currency-hedged back to U.S. dollars, featured attractive yields and valuations as the region shook off aggressive interest-rate hikes and economic headwinds accentuated by Russia's invasion of Ukraine.
• "The wide differential between euro- and U.S.-dollar-denominated credit spreads is presenting investment opportunity," says London-based Foggin, who co-manages Fidelity Advisor^® Global Credit Fund with Lisa Easterbrook, Matthew Bartlett and Andrew Lewis.
• The fund is a diversified fixed-income strategy providing investors one-stop access to a broad mix of debt securities issued anywhere in the world. The co-managers maintain significant flexibility to capitalize on when and wherever they see the most favorable prospects, through both security selection and sector positioning among corporate, sovereign, supranational and high-yield bonds.
• With U.S.-denominated debt experiencing tight credit spreads and, thus, only limited room for meaningful gains, Foggin and team have pursued better buying opportunities among euro-denominated bonds that they believe offer significant value.
• "In 2011 and 2012, there were genuine concerns about the future of the eurozone and the likelihood of countries defaulting and potentially leaving the EU altogether," he says.
• This is far from the case now, according to Foggin, who cites stronger political cohesion and fundamentals among banks/other institutions that he believes should help insulate financial markets from the impact of any potential economic downturn.
• While some investors may argue that ongoing geopolitical events may warrant avoiding sizable exposure to European bonds, Foggin takes a different view.
• "I would actually suggest these events are not impacting the bonds' creditworthiness but, rather, are creating discounts within this pocket of the global credit market," he contends. "Furthermore, should Europe experience an economic downturn in the near future, I believe bond valuations are likely to remain resilient and, with the help of central bank efforts, outperform."
• Within the current environment, the team has positioned the fund with outsized exposure to euro-denominated corporate bonds, and a large underweight in U.S.-dollar-denominated corporates, as of March 31.
• "We're extremely excited about what we see as opportunity for significant upside, along with fairly limited downside, given the current state of the European credit market," concludes Foggin.