European credit in sweet-spot amid hunt for resilience and diversity
An ever-sharper focus by fixed income investors in Asia to find meaningful diversification, a competitive yield and quality profile are creating new options for portfolios. Among them, European credit offers a viable alternative.
This is especially the case for those asset owners in Asia that may have heavy US exposure, yet have seen a tightening of credit spreads to near historical lows in the world’s largest fixed income market.
Instead, Europe presents a stronger fiscal backdrop and renewed political momentum to support growth through increased public investment in defence and infrastructure. Notably, credit market valuations have largely recovered from the volatility in the wake of ‘Liberation Day’, reflecting improved sentiment and de-escalation in some key trade disputes.
Ultimately, these attributes bode well for European credit as a strategic building block for global fixed income portfolios.
European credit makes compelling case
Heightened concern about US fiscal policy, the politicisation of the Federal Reserve and the potential for higher inflation are all playing a role in investors looking to diversify away from US markets. In turn, European investment grade (IG) credit has become an increasingly appealing component of global fixed income portfolios.
At its core, through a mix of scale, quality and value, it provides a stable source of income with attractive risk-adjusted yields. This comes from a universe that ranges from traditional corporate names along with a wide array of financial institutions issuing subordinated debt, to sovereign owned and quasi-sovereign borrowers, to non-European corporates looking to diversify their funding sources.
This backdrop to the asset class blends with the current market environment to offer what we see as five key benefits:
- Attractive valuations and yields – European IG spreads remain above long-term averages, offering good carry opportunities to give investors meaningful income potential without excessive duration risk.
- Improving fundamentals – Corporate balance sheets in Europe are generally healthy, with conservative leverage, strong interest coverage ratios and limited refinancing needs, all supported by a stabilising inflation outlook.
- Supportive policy and interest rate dynamics – The fiscal policy backdrop for 2026 should become increasingly favourable as increased German government spending kicks in, plus easing financial conditions and moderating inflation can lower default risks.
- Diversification benefits – Compared with US-centric corporate bond indices, there is less technology concentration in Europe and more weight towards the financials sector, helping investors to diversify their overall sector exposure.
- Opportunities for active alpha – The credit dispersion that exists across countries, sectors and issuers in Europe enables active managers to exploit relative-value opportunities.
In short, global investors can get access to a much broader range of risk and return profiles via European credit than ever before.
Seeking reliable quality
Put simply, the appeal of this market is anchored in its increasing diversity with reliable quality.
Yet investors need a selective lens. For example, there are mixed valuation signals, such as BBBs being compressed versus their A and AA peers. Further, political and regulatory risks exist amid EU fragmentation and some sector-specific headwinds. However, we believe the challenges are manageable and well understood by market participants.
We prefer to look for more tariff and recession-resistant, carry-enhancing opportunities with the potential to earn attractive income from high-quality IG issuers without stretching for risk. More specifically, this means shorter-dated BBs that are less exposed to cyclical risk, along with select AT1 structures where the risk/reward ratio still looks attractive, in our view.
Demand remains strongest in the three-year to seven-year segment, where the curve offers enough yield without excessive duration risk amid lingering rate uncertainty.
By sector, meanwhile, there is a rotation away from autos, given tight spreads, and towards banks, which still offer solid fundamentals and meaningful carry.
In addition, there is healthy primary and secondary liquidity, with regular issuance across a range of maturity buckets also adding to price transparency.
Counting on quality exposure
In a European environment where both the fiscal and political landscapes are showing signs of stability and growth, we believe investors should aim to focus on quality while carefully managing risk.
Such an approach will help contribute towards portfolios being able to achieve strong risk-adjusted returns in all market conditions. It is also important to preserve value, to minimise exposure to issues that get downgraded to high yield.
If investors can capitalise on both the income and growth opportunities offered by European credit while navigating today’s market complexities, then we believe it deserves a place as a strategic building block for fixed income portfolios globally.
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About the authors
Ben
Ben joined L&G’s London team in 2008, initially focusing on credit strategy before taking on the role of Head of Investment Strategy and Research, coordinating L&G’s research from long-term themes to short term market drivers. He also chaired the monthly investment macro meeting for many years, a key input for portfolio risk across the active strategies. He relocated to Hong Kong in 2020, joining the Legal & General Investment Management Asia Limited's Board as a Director and was appointed Head of Investment Strategy, Asia to help grow L&G-Asset Management’s investment business across the APAC region. Ben started his career in 1999 as a credit strategist at Dresdner Kleinwort Benson in London, before performing the same role at both BNP Paribas and Lehman Brothers. He holds a Master of Arts in Mathematics from Queens' College, Cambridge University.
Marc
Marc is head of the European Credit team. He joined L&G’s Asset Management division in 2012. Marc previously spent 12 years at Blackrock, first as a senior portfolio manager within Philips Investment Management in Eindhoven and then as Director, Investment Manager in London, where he was responsible for the non-financials management of investment-grade portfolios and was a portfolio manager for two Asian credit portfolios. Marc started in the industry in 1995 as a portfolio manager at ABP investments (now APG). He graduated from Tilburg University, Netherlands with an MSc in economics and is a Certified European Financial Analyst (CEFA).
About L&G
Established in 1836, L&G is one of the UK's leading financial services groups and a major global investor, with US$1.533 trillion in total assets under management of which 43% (US$654 billion) is international (Source: L&G, global AUM as at 30 June 2025. Excludes assets managed by associates (Pemberton, NTR, BTR). The AUM includes the value of securities and derivatives positions and may not total due to rounding). L&G's Asset Management business is a major global investor across public and private markets. Our clients include individual savers, pension scheme members and global institutions, who invest alongside L&G’s own balance sheet. Our ambition is to be a leading global investor, innovating to solve complex challenges for our clients using the power of L&G. This is rooted in our investment philosophy and processes, which are focused on creating value over the long term.
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