Corporate Credit Snapshot – 31 October, 2019

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  • Global fixed income returns were mixed in October with emerging market (EM) corporates generating a positive return and outperforming US fixed income which generated modest, positive returns.  European fixed income declined, led by the Bund
  • Credit traded off at the start of the month on concerns about trade wars and potential company earnings
  • Sentiment shifted as US-China trade tensions abated and the probability of a no-deal Brexit declined, benefiting credit markets but pushing government bond yields higher (prices down)
  • The Federal Reserve cut rates, but issued guidance suggesting a likely pause in future cutting unless warranted by economic data. At the close of the month, European Central Bank (ECB) President Mario Draghi departed, however his program of monetary easing measures remains and continues to offer a catalyst for the region’s credit market

US
US fixed income returns were mixed in October with US investment grade generating a positive return and outperforming more modest positive gains from high yield and Treasuries.  Loans declined.  Credit traded off at the start of the month on concerns about trade wars and potential company earnings.  Sentiment shifted to more risk-on as trade rhetoric softened and the US and China moved closer to a resolution.  Earnings were mixed even among strong issuers, highlighting the importance of fundamental credit research, and of understanding each portfolio issuer (and even individual issues).  We are beginning to see return bifurcation with quality more in-demand and generally outperforming.  The Federal Reserve cut rates, but issued guidance suggesting a likely pause in future cutting unless warranted by economic data.

Europe
European credit declined modestly, with positive excess return more than offset by the impact of rising government bond yields over the period. European credits underperformed their US counterparts in October, as the rise in Bund yields was slightly larger than the US equivalent. October was marked by abating US-China trade tensions and lower probability of a no-deal Brexit, both of which benefited credit markets but pushed government bond yields higher (prices down).  Weak data from the Eurozone manufacturing sector persisted, however, unemployment across the region remained resilient.  Initial 3Q19 GDP prints beat depressed expectations, revealing steady expansion at a very modest pace despite further anticipated slowdowns.  Overall modest growth over the third quarter included markedly different national performances—with healthy growth in Spain, slight growth in Italy (which had not grown in the previous quarter), and France’s economic resilience outpacing expectations.  At the close of the month, European Central Bank (ECB) President Mario Draghi departed, however his program of monetary easing measures remains and continues to offer a catalyst for the region’s credit markets.  As Christine Lagarde, incoming ECB president, steps into office, she will need to contend with dropping inflation (dragged down by energy prices) and sluggish growth in non-industrial goods prices.  We continue to expect technical factors to be supportive for the immediate future.

EM
Emerging market corporates again delivered positive performance, adding to robust year-to-date gains for the asset class. Continuing September’s trend, high yield bonds outperformed investment grade. The  majority of countries and sectors produced positive returns, despite mixed news flow. Argentina’s presidential election dominated Latin American headlines after Peronist Alberto Fernandez defeated market friendly incumbent Mauricio Macri, albeit with a smaller majority than expected. Elsewhere in the region, Brazil passed its long-awaited pension reform plan which forms part of a broader package of measures to help stabilise the country’s public finances and in turn, the broader economy.  Signs of weakening global growth were felt in emerging as well as developed market economies as China announced economic growth had slowed to 6% in the third quarter, citing trade tensions as a primary contributor. However, to take advantage of low global interest rates, the country announced plans to issue a euro-denominated sovereign—its first in over a decade—in an attempt to diversify away from US dollar denominated debt. Meanwhile in South Africa, the country disappointed with its much-awaited, medium-term budget policy statement. The treasury report had been designed to represent the ‘worst case’ scenario and kick start government reconsideration of the February budget in time to offset fiscal deterioration.