Are investors’ decisions over risk and return becoming more rational? To what extent do the market’s fears over headline risk, as opposed to credit, determine what advice you give to clients?


Alex Chambers
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Miles Millard, European head of debt capital markets, Deutsche Bank
Investors have built up significant pools of liquidity over the last six months that they are now putting to work as the headline risks are easing and spreads have stabilized at levels that offer value.

Jean-François Mazaud, deputy head of capital raising and financing at SG
Investors’ decisions may have become more rational, although we are of the opinion that they are not at all the only parties responsible for the irrationality of the market in H1 2007. Headline risk is clearly important, as well as the credit or equity story for them today. Access to liquidity is also more and more scrutinized.

Roberto Isolani, joint head of global capital markets at UBS
Yes, I think they are. If the level of oversubscription that we have seen recently is anything to go by, the power is slowly shifting back to the issuers. Investors are doing a lot more of their own sector and credit work. The European market has become much more sector-focused and in some sectors (eg home building) there is still no price attractive enough to allow certain deals (eg 10-year and longer in size).

Investors have come to accept that headline risk is not going to go away, so they need to focus more on the specific credit/sector.

The knife has stopped falling for a while, so fundamentals are taking over from technicals, but it is a daily battle. Headline risk is more severe due to the immediate short sellers appearing just as market-makers/buyers vanish.

Siddharth Prasad, head of EMEA FIG capital markets and financing at Merrill Lynch
Investors have swung from irrational exuberance to a position of almost irrational fear where no yield is high enough. Conserving cash has been the watchword for the first nine months. This is now starting to change.

Having said that, we are bullish on credit, not credit spreads.

The process of healing has begun with structured credit/sub-prime write-offs and related capital raising by FIG being part of the healing process. Headline risk will remain an issue for the foreseeable future, given downside risks to the economy. It is no longer the credit crunch doomsday but now the economic downturn impact. Advice to clients is to take advantage of issuance windows as they emerge.

Chris Tuffey, head of EEMEA debt capital markets at Credit Suisse 
I believe that most investors’ decisions have been rational for quite some time. The volatility was in part caused by forced sellers of risk in an illiquid market and many investors waited patiently for stability before investing their excess cash at attractive levels in the credit market. Those that invested early, before the market stabilized, found that they were trying to catch a falling knife as the market traded technicals rather than fundamentals. It is interesting to note that the market has absorbed some very weak headlines over the last few weeks but still continues to perform well. There is certainly the risk that corporate and bank earnings weaken later this year or next due to slowing economies, and historically that would point to weakness in the credit markets but given the current valuations there is an argument to say some of that is already priced in.

Martin Egan, head of primary and global head of debt capital markets at BNP Paribas
Markets are becoming more rational after a period of instability. In most instances investors have behaved in a very mature fashion throughout the crisis but have been rightly appalled at the dramatic reduction in liquidity provision (ie, making markets) by their key banking counterparts.

Of course, shocking conditions over the last months have not made making markets easy but confidence in the system needs to be restored. Thankfully the slew of negative headline risk hitting the markets on a daily basis has abated, hence some semblance of confidence has returned.

Stephen Jones, head of European financing solutions group at Barclays Capital
The recent contraction in credit spreads from the wide levels of mid-March has been largely driven by technical rather than fundamental factors. Investors have reacted to this performance by shifting from a largely underweight position in investment grade credit to being buyers.

The recent spate of new issue supply has demonstrated the significant cash available. Bonds in both the corporate and financial sector were heavily oversubscribed, with multiple-billion order books. That being said, institutional investors did demonstrate price sensitivity, particularly for the lesser-rated credits.

Investors do remain risk averse to the less stable sectors and lower rated credits. The crossover and high-yield markets remain largely closed, as do sectors such as retail and property.

We expect the performance of the market to be largely driven by headline factors, with investors and issuers focused on the threat of inflation, US recession and liquidity concerns.