Credit Continuum – January 2018

Expect more of the same at the dawn of 2018

Despite a weaker end to the year in performance terms for some credit-sub asset classes, looking ahead we anticipate 2018 is likely to be another year of positive performance for credit markets.

However, the gradual withdrawal of quantitative easing and monetary policy tightening is likely to result in higher yields and consequently a less robust set of annual absolute returns than 2017.

The themes that dominated much of 2017 are likely to continue to remain prevalent as we move into the New Year. As indicated in the Federal Reserve’s December meeting, rates are likely to continue to move higher in the US, with another three rate hikes currently priced in for 2018.

Solid employment numbers however are eventually likely to push inflation expectations higher, which would have an impact on the speed of US monetary policy tightening, although for the moment inflation continues to remain below trend.

Although there are fears of the impact of the Fed’s great QE unwind on corporate credit, the much-lauded tax reform bill has now been enshrined into law. This should be a tailwind for the less indebted (i.e. higher-quality) segment of the high yield market. The newly-imposed 30% limit on interest expense deductibility will have more of a negative effect on corporates with higher leverage.

Meanwhile in Europe, the European Central Bank’s ongoing asset purchase programme, which has been reduced from €60bn to €30bn per month in January 2018, should be maintained as such for much of the year, and should continue to prove a boon for European credit markets.

Economic growth on a global basis remains solid and on track, underpinned by recent data releases. Emerging markets are also a key beneficiary of an uptick in global trade as well as higher oil prices, where the benchmarks on both sides of the Atlantic are now above US$60p/b.

Nevertheless, while the outlook appears rosy, the impact of any negative shocks or unexpected geopolitical events, such as North Korea, could stall the positive momentum that, for the moment, shows no signs of abating.

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Important Information

This document has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past results do not guarantee future performance. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested.

Any research in this document has been procured and may have been acted on by Muzinich for its own purpose. The results of such research are being made available for information purposes and do not constitute investment advice. Opinions and statements of financial market trends that are based on market conditions constitute our judgement as at the date of this document. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted.

Emerging Markets may be more risky than more developed markets for a variety of reasons, including but not limited to, increased political, social and economic instability; heightened pricing volatility and reduced market liquidity.

Issued in Europe by Muzinich & Co. Ltd, which is authorised and regulated by the Financial Conduct Authority.