Corporate Credit Outlook 2021 – A Brighter Future That Comes With A Price

Key Takeaways

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Credit – Further compression and the hunt for yield with strong technicals in 2021

  • The big reset in economic prospects should trigger deep portfolio re-balancing, with accumulated cash put to work in early 2021
  • The search for yield will likely dominate the credit asset allocation, as the ultra-low rates environment continues, supporting further spread compression amid excess liquidity channelled into credit markets
  • High yielding markets should benefit from better cyclical prospects and lower default/loss risks
  • We see main opportunities in emerging markets corporate bonds, global high yield bonds, and leveraged loans in a carry focused investment strategy
  • We favour Euro investment grade over US investment grade on a relative basis due to European Central Bank support and reduction in bond supply
  • We are carefully rotating global portfolios to ‘reopening’ sectors in global credit, such as autos and energy, with attention to the individual balance sheet’s strengths and weaknesses

Macroeconomic Environment – A brighter future requiring further fiscal and monetary support

  • Recovery will likely remain uneven in 2021 and fiscal policies are unlikely to shift to austerity soon. Continued support from monetary policies will be needed to prevent unwarranted financial conditions tightening, and to help maintain the cost of servicing debt at affordable levels
  • With persistent low levels of inflation in developed economies, short rates are “pinned” and changes in the economic outlook will reflect on the steepness of yield curves
  • Emerging economies’ recovery, supported by a dynamic export sector and a translation into domestic demand, is well underway, especially in China. The commodity prices’ bullish cycle should benefit Latin America

Fundamentals – Further improvement in 2021 with earnings growth but still highly liquid balance sheets

  • We see improving fundamentals trend to likely continue in 2021 from 1H20 lows
  • We expect persistent earnings growth to progressively reduce leverage from elevated levels in 2020. Corporates may want to keep high liquidity on the balance sheet as a cheap insurance policy, in case the economic recovery disappoints expectations
  • We keep a constructive view on fallen angels for 2021, both in USD and Euro markets

TechnicalsThe big rotation from cash to a search for yield, and lower supply

  • Less gross issuance and investors with a higher risk appetite, could help to further compress credit spreads in 2021
  • High yielding assets are set to benefit amid improvement of economic prospects, and lower default risks
  • We expect the European Central Bank to continue to purchase corporate bonds, reducing bond supply risk from non-financial investment grade issuers

Valuations – From tight to … tighter

  • Total return prospects for investment grade (IG) will likely be closely linked to yields’ direction given tight spread situation, more so in the US
  • Further compression of spreads differential between high yield (HY) and IG is expected, with B-rated companies to perform further, before being considered too rich
  • The emerging market premium has remained elevated in 2020 which presents an opportunity to improve spreads and yields in 2021
  • Leveraged loans could offer higher carry and better convexity potential than bonds. We also expect renewed demand from US retail investors for US leveraged loans. Both Euro and US markets should benefit from higher activity in Collateralised Loan Obligation (CLO) printing in 2021.

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Important Information

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Index Descriptions

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.

Bloomberg Barclays Global Aggregate Negative Yielding Debt Index – The Bloomberg Barclays Global Aggregate Negative Yielding Debt Index measures the performance of approximately 2500 securities which currently carry negative yields.  The index is unhedged and currently has an estimated market value of 11 trillion dollars in USD.

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.

H0A1 – The ICE BofA ML BB US High Yield Index is a subset of the ICE BofA ML US High Yield Index (H0A0) including all securities rated BB1 through BB3, inclusive.

H0A2 – The ICE BofA ML single-B US High Yield Index is a subset of the ICE BofA ML US High Yield Index (H0A0) including all securities rated B1 through B3, inclusive.

H0A3 – The ICE BofA ML CCC & Lower US High Yield Index is a subset of the ICE BofA ML US High Yield Index (H0A0) including all securities rated CCC1 or lower.

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.

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.

CSELLI – CS Leveraged Loan Index – The CS Leveraged Loan Index is designed to mirror the investable universe of US dollar denominated leveraged loan market.  The index is rebalanced monthly on the last business day of the month instead of daily. Qualifying loans must have a minimum outstanding balance of $100 million for all facilities except TL A facilities (TL A facilities need a minimum outstanding balance of $1 billion), issuers domiciled in developed countries, at least one-year long tenor, be rated “5B” or lower, fully funded and priced by a third party vendor at month-end.

ER00 – The ICE BofA ML Euro Corporate Index tracks the performance of EUR denominated investment grade corporate debt publicly issued in the eurobond or Euro member domestic markets. 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, a fixed coupon schedule and a minimum amount outstanding of EUR 250 million.

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%.

EM2R – The ICE BofA ML BBB US Emerging Markets Liquid Corporate Plus Index is a subset of the ICE BofA ML US Emerging Markets Liquid Corporate Plus Index (EMCL) including all securities rated BBB1 through BBB3, inclusive.

EMNF – ICE BofA Non-Financial us Emerging Markets Liquid Corporate Plus Index is a subset of The ICE BofA US Emerging Markets Liquid Corporate Plus Index excluding all Financial securities as well as debt of corporate issuers designated as government owned or controlled by ICE BofA emerging markets credit research.

CF0X – ICE BofA US Non-Financial Index tracks the performance of non-financial US dollar denominated investment grade corporate debt publicly issued in the US domestic market.

CF00 – ICE BofA US Financial Index is a subset of ICE BofA US Corporate Index including all securities of Financial issuers.

EN00 – The ICE BofA ML Euro Non-Financial Index tracks the performance of non-financial EUR denominated investment grade corporate debt publicly issued in the Eurobond or Euro member domestic markets. 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 EUR 250 million

EF00 – ICE BofA Euro Financial Corporate & Pfandbrief Index tracks the performance of EUR denominated investment grade pfandbrief and non-pfandbrief financial corporate debt publicly issued in the Eurobond or Euro member domestic markets.

G402 – The ICE BofA ML 7-10 Year US Treasury Index is a subset of the ICE BofA ML US Treasury Index (G0Q0) including all securities with a remaining term to final maturity greater than or equal to 7 years and less than 10 years.

G102 – ICE BofA 1-3 Year US Treasury Index is a subset of ICE BofA US Treasury Index including all securities with a remaining term to final maturity less than 3 years.

EG14 – ICE BofA 7-10 Year AAA Euro Government Index is a subset of ICE BofA Euro Government Index including all securities with a remaining term to final maturity greater than or equal to 7 years and less than 10  years and rated AAA.

EG11 – ICE BofA 1-3 Year AAA Euro Government Index is a subset of ICE BofA Euro Government Index including all securities with a remaining term to final maturity less than 3 years and rated AAA.