Corporate Credit Snapshot – 31 May, 2019

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  • Risk-off sentiment dominated for the month of May on the back of geopolitical concerns such as increasing Sino-American trade tensions, Mexican-American trade tensions, Iran-US sabre rattling, British PM Theresa May’s resignation and the potential for a no-deal BREXIT
  •  As would be expected in such a period, investors flocked to the relative safety of high quality government bonds globally, sending the 10-year yield on the German Bund to a record negative low
  • While Developed Market high yield and, to a lesser degree loans declined, Emerging Market high yield proved resilient
  • Weaker PMI data and an inversion of the US yield curve, gave investors further pause as they contemplate whether this signals an impending recession

US:
Risk-off sentiment dominated for the month of May on the back of geopolitical concerns such as increasing Sino-American trade tensions, Mexican-American trade tensions, Iran-US sabre rattling, British PM Theresa May’s resignation, and the potential for a no-deal BREXIT. As would be expected in such a period, investors flocked to the relative safety of Treasuries, leading to their strong outperformance. Investment grade corporates also generated a positive return, albeit less than that of Treasuries. While high yield and, to a lesser degree loans, declined, they significantly outperformed equities in this risk-off month. Cyclical industries like chemicals, autos, metals/mining and energy significantly underperformed as concerns grew around the economic outlook and future growth rates. While US employment figures remain strong and inflation muted, PMI (purchasing manager) prints were lower this month, raising recession concerns. The yield curve also inverted again this month, giving investors further pause as they contemplate whether this foretells an impending recession. High yield technicals were weaker for the month (outflows coupled with new issuance) while investment grade technicals were solid (inflows, modest issuance). Defaults remain low, so as spreads become more attractive, we believe investors who step in to provide liquidity will be rewarded.

Europe:
European fixed income returns were mixed for the month on the back of ongoing trade tensions and other geopolitical concerns. Government bonds benefitted from a flight to quality as investors sought safe havens, sending the 10-year yield on the German Bund to a record negative low. Tariffs forecast for June on a broad list of Chinese goods triggered a sell-off in both the equities and credit markets. European economic data was fairly positive (PMI, unemployment, disposable income etc.). Despite this constructive data, a downshift in global, and specifically European, inflation expectations have prompted markets to forecast some dovish action from the ECB on interest rates before the end of the year. The European elections delivered an outcome more “market friendly” than anticipated with a larger showing of pro-European parties. In the UK, Prime Minister Theresa May, submitted her resignation, increasing the chances of a no-deal Brexit.

Emerging Markets:
Emerging market returns were mixed for the month with investment grade rated bonds outperforming high yield as rates rallied in a flight to quality. The investment grade segment absorbed the spread widening in high yield, producing an overall positive return for the broader market (despite increasing trade tensions hampering performance in developed market credit). In Argentina, upcoming presidential elections dominated sentiment, with investors soothed by former president Christina Kirchner’s announcement that she would only run for vice president, reducing the possibility of an extreme change in political direction in the event of a Fernandez/Kirchner victory. Elsewhere in Latin America, Mexican corporates held up relatively well despite Trump’s threat of import tariffs to control immigration. India’s Narendra Modi and the Bharatiya Janata party triumphed in the country’s elections in a landslide victory, ensuring a continuation of the economic reforms programme, with the upcoming budget in July now a priority. The election theme continued in South Africa, where the African National Congress retained power under incumbent Ramaphosa amid ongoing hopes of a reduction in corruption as promised by Ramaphosa following his ousting of Jacob Zuma last year. Following Jokowi’s re-election as president of Indonesia in April, the country’s sovereign was upgraded one notch from BBB- to BBB by Standard & Poor’s on the final day of the month, in a reflection of “strong economic growth prospects”, which the agency believes have been strengthened by Jokowi’s re-election.