Important information

This website is for Institutional Investors in Singapore only.

If you are an Individual Investor click here, if you are an Financial Intermediary click here. Should you be looking for information for another location, please click here.

By clicking, you acknowledge that you have fully understood and accepted the Legal and Regulatory Information.

Capital IdeasTM

Investment insights from Capital Group

Categories
Fixed Income
European market outlook: Clouds on the horizon
Elaine Lin
Investment Analyst

After a decade of ultra-loose monetary policy, we are starting to see the intended and unintended consequences of one of the most aggressive periods of monetary policy tightening in history.


As intended, consumer demand is weakening, and lending standards are becoming more restrictive. However, the aggressive tightening of monetary policy is also testing the financial system and the collapse of SVB and Credit Suisse are the unintended consequences.


According to investment analyst Elaine Lin, these recent events have meaningfully increased the likelihood of a recession. Even though central banks and regulators have been quick to act and are standing ready to shield the financial system from another 'Lehman moment’, it is important to note that the economy doesn’t need another global financial crisis to enter a recession.


The European Central Bank (ECB), whose only formal mandate is to maintain inflation at 2% still needs to contend with elevated inflation. The latest data shows eurozone core inflation at its highest level on record. Therefore, despite the recent market volatility, the ECB went ahead and delivered a pre-committed 50bps at its March meeting. However, it has abandoned its forward guidance and is now completely focused on data dependency.


This, according to Lin, is probably the right approach as they no longer have clear insight into how the economy will now unfold. This also likely implies a lower terminal rate as economic data deteriorates further.


Given this backdrop and the rising probability of a eurozone recession, Lin believes there is now in my view more value in Bunds. She has added euro duration to capture some of this value and remains underweight sovereign spreads in countries like Italy. 



Elaine Lin is a fixed income investment analyst at Capital Group with research responsibility for Western Europe sovereign debt markets. She has 15 years of investment industry experience and has been with Capital Group for three years. She holds a master's in economics from London School of Economics and a bachelor's degree in accounting & economics from Southampton University. Elaine is based in London


Past results are not predictive of results in future periods. It is not possible to invest directly in an index, which is unmanaged. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.

Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.