Rich Europeans Have $14.7 Trillion and Are Ready to Pile Into Credit Markets

Thought that inflows into European corporate bonds had peaked? Think again. Analysts at Bank of America Merrill Lynch have just identified a whole new potential buyer base.

European high-net worth individuals with a total wealth of more than $14.7 trillion are holding close to 24 percent of their portfolios in cash, the most since 2013, according to analysts at the bank. Frustration over negative interest rates in the euro zone is likely to drive much of that money into credit, they said.

Chart from BofAML research note
“For now, we think there remains plenty of pent-up demand to buy credit,” analysts at BofAML including Barnaby Martin said in a research note. “Negative deposit rates will undoubtedly be a frustration in due course for these investors, driving yet another reach for yield into euro credit markets.”

Investors have already plowed $38.2 billion into active funds that track investment-grade euro credit this year, accepting ever-lower yields while European Central Bank bond-buying weighs down costs. That’s prompted commentators including HSBC Holdings Plc’s Steven Major to warn yields are no longer compensating investors for default risks.

The number of high net-worth individuals in Europe jumped to 4.5 million at the end of 2016, up from 4.2 million a year earlier, according to the BofAML note citing Capgemini SE research. The growth, particularly strong in the Netherlands and France, was supported by a stronger-than-expected recovery in the euro zone and the easing of the debt crisis in the region’s periphery.

“The remarkable story of 2017 has been the incessant ‘lust for yield,’” the analysts said. “We believe these inflows are structural, rather than opportunistic, and reflect the pressure on cash returns that negative interest rates are imparting. We see no imminent end to these inflows.”
Source: Bloomberg