The proportion of investors expecting to decrease their covered bond holdings has more than halved in an annual Fitch survey, with the rating agency recording a high for the proportion of investors who expect to maintain the level of their holdings, although within the asset class there are winners and losers.

In a December 2016 survey that garnered 43 responses (up from 35 a year previously but below the 52 of December 2014), Fitch found that 18% of investors expect to decrease their holdings somewhat in the next 12 months versus 37% who expected to decrease somewhat or substantially in 2015 and 30% in 2014.

Some 58% of respondents expect their covered bond holdings to remain the same (versus 41% and 28%, respectively), and an aggregate 24% expect them to increase somewhat (13%) or significantly (10.5%), up from an aggregate 22% in 2015 but down from 43% in 2014. According to Fitch, the 58% expecting to maintain their holdings is the greatest share since the inception of the survey in 2010.

“The status quo illustrates covered bonds’ reputation as a safe asset class, particularly in light of perceived geopolitical risk,” the rating agency said. “For the first time since 2011, the survey marked a drop in the percentage of respondents anticipating a decrease in their covered bond holdings, despite mounting concerns on the general condition of the banking sector and the ECB quantitative easing continuing to weigh on returns and market liquidity.”

European QE was the factor cited by the most respondents as one of the biggest challenges to the covered bond market, at 56%, while a lack of secondary market liquidity – often linked to the European Central Bank’s third covered bond purchase programme (CBPP3) – was the second most-cited (49% – respondents could select more than one factor).

The health of the banking sector ranked third (42%) among the biggest challenges and geopolitical risk fourth (33%). Fitch highlighted as reflective of the former 20% of respondents saying they are likely to decrease their exposure to Italy – more than for any other area – citing investors risk aversion towards “a banking sector burdened by non-performing loans”.

“Investors are showing an increasing interest in covered bonds issued outside Europe,” the rating agency added, “especially in Singapore, where covered bonds have recently started to be issued. Covered bond investors are also attracted to issuance from other stable AAA countries, such as Canada and in Scandinavia.

“The uncertainty over Brexit consequences is likely to be the reason why some investors intend to reduce their exposure to UK covered bonds over the next 12 months.”

In the next 12 months, your covered bond exposure to the following areas is likely to:

Source: Fitch Ratings