Definition and Explanation of our Recommendation Categories
Bonds in general
Unless otherwise noted, our bond recommendations always pertain to the performance of the bonds in local currency (excluding any exchange rate developments). The expected development of the exchange rate is the subject of a separate recommendation.
Recommendations made in EUR terms (the total performance in such cases consists of the bond performance in the local currency plus the anticipated exchange rate performance vis-à-vis the EUR) are always specifically designated as such.
-
Buy:
We recommend buying the investment instrument, as the expected total performance (change in price plus accrued interest) for the recommendation horizon exceeds the expected return on the money market (1) of the respective currency in absolute terms by more than 100 basis points.(2) -
Neutral:
We expect the investment instrument to move sideways (or view the likelihood of a price increase as approximately the same as that of a price decrease). As a result, the expected performance (change in price plus accrued interest) for the recommendation horizon is broadly comparable with the alternative rate of interest on the money market1 of the respective currency (expected performance: money market rate +/- max. 100 basis points). For investors who do not have the option of short selling, we recommend holding the existing position in the investment instrument (no additional purchases, but no sale of existing positions). In the case of a “Neutral” recommendation, investors who are able to engage in short selling of the investment instrument should not maintain a position in the investment instruments (close existing long or short positions). -
Sell:
We recommend selling the investment instruments, as the expected total performance (change in price plus accrued interest) for the recommendation horizon is in absolute terms more than 100 basis points lower than the alternative rate of interest on the money market1 of the respective currency.
(1) Alternative rate of interest on the money market for the corresponding currency and recommendation horizon, i.e. for a 3-month recommendation horizon on EUR bonds = 3M Euribor, 6-month recommendation = 6M Euribor, 12-month recommendation = 12M Euribor.
(2)Example: the expected total performance of bond X over a 6M horizon = 2.2% (non-annualised), whereas the 6M Euribor yields 1.1% (non-annualised) over the coming 6 months; hence, the expected return of 2.2% is more than 100 basis points higher than the alternative rate of interest 1.1% (in this case the return on the bond is 110 bp higher, or 1.1%), and we thus recommend a Buy.
Special recommendations for corporate bonds
Spread recommendations
-
Buy:
We recommend buying the investment instrument, as in our opinion the asset swap spread (spread to the swap curve) of the instrument will decline. The extent of the anticipated decline, however, can be different for each bond or issuer. We only issue a Buy recommendation if we believe that the decline in the asset swap spread will be adequate in consideration of the maturity and risk. -
Neutral:
Our recommendation on an investment instrument is “Neutral” (Hold) when we are of the opinion that the asset swap spread on the instrument will not change materially. We only issue a “Neutral” recommendation if we believe that there will be no increase or decrease in the asset swap spread adequate in consideration of the maturity and risk. -
Sell:
We recommend selling the investment instrument, when in our opinion the asset swap spread on the instrument will increase. The extent of the anticipated increase, however, can be different for each bond or issuer. We only issue a Sell recommendation if we believe that the increase in the asset swap spread will be significant in consideration of the maturity and risk.
Relative value recommendations
-
Overweight:
We recommend an overweight position in an investment instrument, as we believe that the spread of the instrument will decline compared to the spread of the overall market. (3) -
Equal-weight:
We recommend equal-weighting of an investment instrument because in our opinion the spread of the instrument is not expected to change materially compared to the spread of the overall market.
-
Underweight:
We recommend an underweight position on an investment instrument as we believe that the spread of the instrument will increase compared to the spread of the overall market.
(3) The overall market is measured by the MSCI Euro Corporate Non Financial Index (Bloomberg: MCINSP), and for high yield instruments the Euro High Yield Constrained Index (Bloomberg: HEC0) is used.
Recommendation for new issues
Fundamentally speaking, the same recommendation categories are used for the primary market, with the exception that the spread recommendation cannot be “Sell”. Instead of a Sell recommendation, in such cases we issue a "Do not buy" recommendation.
-
Do not buy:
We recommend that investors do not buy the investment instrument, when in our opinion the asset swap spread of the instrument will increase. The extent of the anticipated increase, however, can be different for each bond or issuer. We only issue this recommendation if we believe that the increase in the asset swap spread will be significant in consideration of the maturity and risk.
Exchange rate recommendations
These recommendations are based exclusively on the expected exchange rate movements themselves, without consideration of any possible differences in interest rates.
-
Buy:
We expect the exchange rate to increase in numerical terms, with due regard to the financial markets’ traditional method of quoting the currency pair in question.(4) -
Neutral:
We expect that the exchange rate will move sideways in the fluctuation band normal for the currency in question. -
Sell:
We expect the exchange rate to decrease in numerical terms, with due regard to the financial markets’ traditional method of quoting the currency pair in question. (5)
(4) For example, EUR/JPY (sometimes also written as EURJPY) is usually quoted on the financial markets as 1 EUR = x JPY. Thus, a Buy recommendation for EUR/JPY implies that the EUR/JPY exchange rate is set to rise in numerical terms, e.g. from EUR/JPY 130 to EUR/JPY 140, i.e. in this case, the yen depreciates against the euro, as the EUR appreciates vis-à-vis the JPY.
(5) For example, EUR/CHF (sometimes also written as EURCHF) is usually quoted on the financial markets as 1 EUR = x CHF. Thus, a Sell recommendation for EUR/CHF implies that the EUR/CHF exchange rate is set to decrease in numerical terms, e.g. from EUR/CHF 1.60 to EUR/CHF 1.50, i.e. in this case, the Swiss franc appreciates against the euro, as the EUR depreciates vis-à-vis the CHF.
