Investors confident in Europe's upturn should consider purchasing bonds from the region's struggling peripheral countries, as well as seeking value in its stock market, euro zone analysts said.
Research from Barclays on Wednesday suggested that government bonds from countries such as Italy and Spain should outperform this year, while Royal Bank of Scotland (RBS) said these bonds could also provide a means to hedge against higher releveraging risk, as the falling cost of capital makes borrowing more feasible.
"While U.S. firms are already engaging in M&A (mergers and acquisitions) and leveraged buyout activity, European corporates remain very conservative, mindful of the risks of lower ratings. But with positive growth in 2014, releveraging risk could gradually come to Europe, too," said RBS's head of European macro credit research, Alberto Gallo.
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Releveraging — or taking on debt — can help companies invest or generate shareholder wealth, but it increases a company's potential losses. It can also cause bond prices to fall, as businesses may opt to raise debt in the credit market, potentially increasing the supply of corporate debt.
As such, areas of the credit market with a less severe risk of rising rates and releveraging, such as financials and the periphery, were preferable, Gallo said.
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