HALISTER1: Key Threats to European Equity Returns Similar to U.S.: JPM

Key Threats to European Equity Returns Similar to U.S.: JPM

(Bloomberg) -- The key threat to European equity returns is similar to the U.S., spread compression and lack of collateral, JPM analysts Rishad Ahluwalia, Jacob Kurosaki and Heather Rochford wrote in March 10 research note.
  • “For total return-benchmarked investors, post-crisis CLO equity prices are the highest they’ve been since 1Q’15, and the investment profile is evolving into a carry trade with less price upside”
  • Investors should also consider relative valuations of B/BB to the extent forecasted equity yields are less attractive in some scenarios
    • “On the other hand, again, CLO equity offers one of the highest levels of upfront carry that is achievable in the region, which has a dearth of high-yielding fixed income opportunities”
  • After a volatile first half to last year that saw prices hit lows of 74.64 at the end of February, European CLO equity rebounded and appreciated $12.50, or 16.5%, through to end of the year
    • “In total, post-crisis issued European CLO Equity experienced an 8.8% price return in 2016”
      • Analysis based on sample of up to 119 post-crisis European CLO equity tranches
  • “Across a sample of 63 post-crisis issued European CLOs, European CLO Equity total returns came in at an average 32.21%”
    • Of the 63 deals, 30 (48%) are 2014 vintage, 19 (30%) are 2015, 14 (22%) are 2013; 2015 vintage had highest dollar price at the end of 2015

Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Rishad Ahluwalia (JPMorgan Chase Bank NA)
Heather Rochford (JP Morgan Securities LLC)
Jacob Kurosaki (JP Morgan Securities LLC)

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