Investing.com -- BCA Research issued a warning about the outlook for European credit markets in a note Tuesday, telling investors that it's time to turn negative on the asset class.
The analysts argue that European credit spreads have "little room to narrow further from current levels," leaving investors insufficiently compensated for the growing risk of a recession that could materialize later this year or in early 2025.
One key concern highlighted by BCA Research is the impact of upcoming European Central Bank (ECB) rate cuts.
Contrary to the typical market optimism associated with rate reductions, BCA warns that these cuts "should not be viewed as positive for credit" because they are likely to coincide with "darker days ahead for markets."
Another critical issue is the so-called "maturity wall," referring to the significant refinancing needs facing European companies in the near term.
According to BCA, this will push up borrowing costs, leading to a "further deterioration of corporate balance sheets," particularly for high-yield (HY) issuers.
This deterioration, combined with already strained balance sheets, is said to raise the prospect of more defaults in the coming months.
BCA's models suggest that European high-yield credit is currently "expensive," further supporting their negative outlook.
As a result, BCA Research recommends that investors favor higher-quality assets within their fixed-income portfolios and continue to prefer sovereign bonds over corporate credit.
"The speculative default rate will rise over the next 12 months. Within fixed-income portfolios, we continue to recommend investors favor sovereign bonds over credit," BCA concluded.