Long Term Valuations Can’t Be Ignored – April 2020

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Executive Summary

  • In our opinion, corporate credit markets have faced three large shocks: volatility, convexity and liquidity. These have rarely coincided.
  • Globally, economic forecasts are still unstable and being revised downward almost on a weekly basis. We now believe that an exceptionally deep, but hopefully short recession is priced in.
  • Monetary policy has been reactive with swift rate cuts and record quantitative easing programs which have yet to kick in.
  • Fiscal policy is taking shape with significant stimulus programs planned globally.
  • Banking support (particularly in Europe) is crucial through cheap financing and loan guarantee schemes.
  • Corporate credit fundamentals have deteriorated but corporates are under pressure to improve credit metrics.
  • Large corporate credit outflows have temporarily weakened technicals.
  • Corporate credit spreads now incorporate a significantly higher risk of default or downgrade (fallen angels) and reflect an exceptionally high liquidity premium.
  • Total return outlook for corporate credit has been historically positive when spreads have reached such crisis levels.

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Index descriptions:

C0A4 – The ICE BofA ML BBB US Corporate Index is a subset of the ICE BofA ML US Corporate Index (C0A0) including all  securities rated BBB1 through BBB3, inclusive.

H0A0 – The ICE BofA ML US High Yield Index tracks the performance of US dollar denominated below investment grade  corporate debt publicly issued in the US domestic market. Qualifying securities must have a below investment grade rating  (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one  year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount  outstanding of $250 million.

ER40 – The ICE BofA ML BBB Euro Corporate Index is a subset of the ICE BofA ML Euro Corporate Index (ER00) including all  securities rated BBB1 through BBB3, inclusive.

HEC0 – The ICE BofA ML Euro High Yield Constrained Index contains all securities in the ICE BofA ML Euro High Yield Index

(HE00) but caps issuance exposure at 3%.

ICE BofAML Single-A US Corporate Index (C0A3) ICE BofAML Single-A US Corporate Index is a subset of ICE BofAML US  Corporate Index including all securities rated A1 through A3, inclusive.

C0A0 – The ICE BofA ML US Corporate Index tracks the performance of US dollar denominated investment grade corporate  debt publicly issued in the US domestic market. Qualifying securities must have an investment grade rating (based on an  average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining  term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $250  million.

You cannot invest directly in an index, which also does not take into account trading commissions or costs. The volatility of indices may be materially different from the volatility performance of an account or fund.