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- Rising idiosyncratic risk and geopolitical events resulted in a risk-off tone for corporate credit markets during the first half of the month
- High yield underperformed investment grade as investors focused on tight valuations and took profits
- Signs of progress in the US tax reform bill lifted US markets later in November
- Economic strength in Asia and Europe were highlighted by positive data
It was a mixed month in performance terms for US corporate credit; high yield and investment grade sold off while loans produced positive returns ahead of increasing market conviction that the Federal Reserve will hike rates in December. High yield was hit early in the month by a number of issues including a rise in idiosyncratic risk and some profit taking as after valuations hit their cycle tights on October 24th. The telecoms sector also came under pressure after Softbank ended merger talks between Sprint Telecom and T-Mobile US while the AT&T/TimeWarner deal remained under regulatory scrutiny.There was also a strong focus on the progress of US tax reform as Trump’s early-month Asia visit led to fears that little headway would be achieved before year end. However, following a short sell off, investors began returning to the asset class at cheaper levels, accompanied by indications that US tax reform was progressing, as was especially evidenced by Senator John McCain’s blessing of the tax reform bill at month end. While the US high yield and investment grade markets ended the month modestly negative, we believe US corporate credit fundamentals remain attractive in an overall positive technical environment.
European corporate credit markets moved lower in November with both the high yield and investment grade portions of the market underperforming their US counterparts. While there did not appear to be a single catalyst that could be blamed for the risk-off tone that dominated markets (notably high yield) early in the month, it is likely that fears that valuations had become too stretched,especially at the lower ratings end of the market, resulted in some profit taking. Political events in Germany made headlines after Angela Merkel failed to form a so-called ‘Jamaica’ coalition government following the collapse of talks between Merkel’s minority Christian Democratic Union party, the Free Democrats and the Greens. With an agreement still not reached by month end, speculation grew of fresh elections, as well as the future of Merkel’s role as Chancellor. Events in Germany, however, did little to dent confidence in the region’s overall growth recovery. The European Commission’s economic confidence indicator stayed at its highest level for a decade while the EBC’s latest Financial Stability Review highlighted economic growth improvements, albeit with the caveat that investors may be taking on too much risk in some areas and could therefore be vulnerable to any sudden economic shocks.
November was a more volatile month for emerging market corporate credit, although returns ultimately ended the month relatively flat. Sector performance was mixed. Commodity-heavy metals and mining and oil and gas corporates benefited from continued strength in the oil price and commodities markets, despite fluctuations mid-month on fears that slower Chinese growth could reduce demand. By month end the OPEC and non-OPEC consortium had also agreed to extend a production cut for the whole of 2018, providing further support to oil prices for an extended period. Consumer and infrastructure credits were slightly weaker. At the regional level, African and Latin American credits continued to benefit from the market’s hunt for yield as well as from the positive performance of commodity issuers. Unsurprisingly, Middle Eastern credits lagged, impacted by the corruption purge in Saudi Arabia, although the furore had died down significantly by month end. Elsewhere, positive economic developments in India, spearheaded by the Prime Minister, showed fruition in the ratings space as Moody’s upgraded the sovereign one notch and changed its outlook. Argentina also benefited from ratings action after Moody’s upgraded the sovereign one notch. On the flip side, S&P and Fitch downgraded South Africa on continued policy mismanagement and corruption. In Asia, South Korea’s central bank implemented its first interest rate hike since 2011, raising rates 25bps to 1.5% on the back of signs of a strengthening economy. Meanwhile China’s economy continued to show signs of growth as the purchasing managers’ index came in at 51.8, which was above market expectations.