In December, the spread on the iBoxx Euro Corporate Index widened by 6 basis points to 172 basis points above the government bond curve. The index earned an absolute return of 0.17%. German 10-year government bond yields closed December at 0.24%, a decrease of 7 basis points compared to the end of November.

The negative sentiment seen on the European corporate bond market during the previous two months continued in December. There is a long list of risks and economic and political developments that investors are viewing with suspicion and that are contributing to the negative sentiment. Examples include: 1) the trade war between China and the US; 2) the shutdown of the US federal government caused by disagreement between the Democrats in the House of Representatives and President Trump on the need for extending the wall on the border with Mexico; 3) the persisting riots and protests by the ‘yellow vests’ in France that are putting pressure on President Macron’s agenda for economic reforms; 4) the slowdown in economic growth in a number of important regions, such as Europe and Asia; 5) the deteriorating creditworthiness of companies caused by a combination of growing debt positions, lower profitability and decreasing diversification due to the dismantling of conglomerate structures; 6) the end of the ECB’s bond-buying programme; and 7) ongoing de-allocation from the corporate bond asset class.

Although the raising of US interest rates by 25 basis points at the end of the month did not come as a surprise, the accompanying remarks by US central bank chairman Jay Powell that the reduction of the Fed’s balance sheet would remain on automatic pilot were badly received by the financial markets. Investors are worried that the US central bank is insufficiently taking into account the potential negative impact that the recent weakness in the equity and corporate bond markets will have on the economy in the long term.

In contrast to last month, subordinated bonds issued by banks and insurers performed better than average. Bonds issued by companies in the real estate, retail and chemical sectors performed worse than average. Sentiment towards French companies was clearly adversely affected by the occasionally violent protests in France.

The supply of new bonds amounted to EUR5 billion in December, about 90% down on November and only just over half the figure for the same month a year earlier. Non-financial sector companies issued EUR5 billion in new bonds, while financial sector companies refrained from issuing new bonds. Bonds worth EUR414 billion were issued over 2018 as a whole, a drop of about 6% compared to the previous year.

During the month, the portfolio’s sensitivity to market trends varied between 98% and 101%. The portfolio therefore held a slight underweight to neutral positioning in terms of market risk.

Our positioning in the healthcare, real estate and telecom sectors performed relatively well in December. In contrast, our positioning in the utilities and insurance sectors, as well as non-bank financial service providers, contributed negatively. Our liquidity position (in the shape of cash and government bonds) had a positive impact.

At individual company level, positive contributions came from the overweights in Volkswagen, General Electric, OMV, Solvay and Stryker, as well as from the underweights in Fresenius and Unibail-Rodamco. In contrast, the overweights in Phoenix Group, London Stock Exchange, EP Infrastructure and Adler, as well as the underweights in Generali and Daimler made a negative contribution.

In December, the Fund participated in a new bond issue by SAP.

Outlook
The material widening of spreads over the past few months has led to a significant increase in the number of interesting investment opportunities. Furthermore, we expect that a number of the risks listed above will diminish in intensity in the next few months. As a result, we will slightly increase the level of risk in our portfolio.