Credit Continuum – Janaury 2019

While headwinds have increased, valuations have improved

As we move into the New Year, we are faced with a more volatile and uncertain situation where growth expectations have slowed and risk assets have sold off.

In the US, the Federal Reserve (Fed) has been focused on its path of rising rates, although since the end of November the Fed has modified its forward guidance on several occasions suggesting it might be prudent to pause with further rate hikes.

We are also likely to see less fiscal stimulus due to Congress’s political divisions. Government and corporate indebtedness remains high on a global basis and, in addition, we expect ongoing geopolitical uncertainty.

On the other side of the Atlantic, the sustained fall in the unemployment rate no longer seems to be having a positive effect on consumer confidence, while the period in the run up to the European elections in May is likely to nourish political instability and noise.

Slowing economic growth in Europe is also adding to pressure on fiscal plans for 2019, which we expect to diverge from targets. The European Central Bank has also now ended its accommodative monetary policy and we are moving into a period of tightening financial conditions.

These headwinds have created a more difficult environment for markets that we believe is likely to continue and contribute to ongoing bouts of volatility.

However, from an investor’s perspective, we believe valuations have reached what appear to be more appealing levels which could provide some attractive investment opportunities going forward. In addition, corporate fundamentals continue to appear solid in aggregate.

Nevertheless, it is important to ensure we identify what could potentially be weaker credits and de-risk our portfolios accordingly. At the same time, we will continue to maintain our conviction in credits where we believe the underlying fundamental investment case remains intact and where we have a strong belief in the recovery potential of these bonds following any sell off.

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