Snapshot | September 8, 2023
Corporate Credit Snapshot
Please click here to download the full report.
- Global credit delivered mostly positive returns
- US credit delivered mixed returns on the back of higher rates. At month-end, in line with the market, we are no longer anticipating any further hikes from the Fed this cycle unless economic expansion accelerates
- European credit markets generated mostly positive returns. There was some volatility during the month as investors contended with lower PMI data (which could support a pause in rate hikes in September), but also persistently sticky inflation. At month-end, we do not expect the European Central Bank to hike in September, with later meetings remaining data-dependent
- Emerging Markets delivered negative returns this month. While recent developments in China have increased concerns around potential spillover from housing weakness to shadow banking and local government funding stress, August PMIs and policy moves were modestly constructive. Perhaps even more significantly, the momentum of policy support seems to be accelerating—specifically regarding the housing sector
US credit delivered mixed returns, with high yield generating positive performance and investment grade and Treasurys declining on the back of higher rates. Economic data released in August provided something for everyone—depending on your view of the economy. Manufacturing and capital investment continued to contract, while unemployment remained low, and services continued to march forward on expansionary trends. CPI and PPI trends came in around expected levels. The housing sector remained resilient—despite the highest mortgage rates since 2000—mostly due to limited inventory as homeowners are locked into their existing properties with lower mortgage rates (Reuters, 23rd August 2023). We believe the trends for the month illustrate an economy that is slowing overall but not contracting, pushing recession talk into 2024 at the earliest. At the annual Jackson Hole meeting, Federal Reserve (Fed) Chairman Jerome Powell gave a neutral-to-somewhat hawkish speech; he stuck to the script of focusing on getting inflation back to 2% through a “higher for longer” policy. At month-end, in line with the market, we are no longer anticipating any further hikes from the Fed this cycle unless economic expansion accelerates.
European credit markets generated mostly positive returns, with high yield (HY) and investment grade (IG) posting positive performance and government bonds delivering mixed returns. There was some volatility during the month as investors contended with lower PMI data (which could support a pause in rate hikes in September), but also persistently sticky inflation. At month-end, we do not expect the European Central Bank to hike in September, with later meetings remaining data-dependent. After a relatively quiet summer, the last week of August was the busiest week for European IG new issuance since mid-June, with corporates and financials both issuing senior and subordinated instruments. We have not seen this weigh on market sentiment, however, as spreads were relatively unchanged at the close of the week. Looking ahead into September, we have also seen a handful of new HY deals lined up.
Emerging Markets delivered negative returns this month. While recent developments in China have increased concerns around potential spillover from housing weakness to shadow banking and local government funding stress, August PMIs and policy moves were modestly constructive. Perhaps even more significantly, the momentum of policy support seems to be accelerating—specifically regarding the housing sector. In India, despite 2Q23 GDP growth printing close to expectations, there is a growing shadow cast by El Nino on India’s monsoon season, which has produced a disappointingly weak rainfall. If September rains do not compensate for the deficit in rainfall thus far, food inflation could rise meaningfully. In Latin America, both Brazil and Mexico are on track for healthy GDP growth this year, although they seem to be traveling on different paths. Brazil has benefitted from very high agricultural output that has masked some sluggish domestic demand. By contrast, Mexico has reported robust domestic demand, offsetting a large net export drag. With US demand accelerating, trade has become a source of potential upside.
Despite concerns about the global economic outlook, credit markets have remained technically well-supported with what we believe to be attractive current yield levels. We have continued to see a divergence between US and European economic data, pointing to a more severe slow-down in Europe versus a more stable economy in the US. The underlying US economy has shown resilience in the face of the Fed’s tightening cycle, and credit spreads have tightened significantly. Although defaults remain below long-term averages, we remain prudent— focusing on what we believe to be attractive yields in stable credits. Second-quarter earnings generally met expectations; however, we did see some disappointing reports drive bond prices lower for some underperforming credits in the market. We expect to continue to see increasing idiosyncratic risk in credit due to the cumulative effect of tighter monetary policy and higher interest rates. We also expect primary issuance to pick up within the HY markets as issuers from the loans market look to refinance upcoming maturities. We maintain diversification within our portfolios and have increased our allocations to more liquid parts of global credit.
Past performance is not a reliable indicator of current or future performance.
Muzinich and/or Muzinich & Co. referenced herein is defined as Muzinich & Co., Inc. and its affiliates. Muzinich views and opinions. This material has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall. Emerging Markets may be more risky than more developed markets for a variety of reasons, including but not limited to, increased political, social and economic instability; heightened pricing volatility and reduced market liquidity.
Any research in this document has been obtained and may have been acted on by Muzinich for its own purpose. The results of such research are being made available for information purposes and no assurances are made as to their accuracy. Opinions and statements of financial market trends that are based on market conditions constitute our judgment and this judgment may prove to be wrong. The views and opinions expressed should not be construed as an offer to buy or sell or invitation to engage in any investment activity, they are for information purposes only.
This discussion material contains forward-looking statements, which give current expectations of a fund’s future activities and future performance. Any or all forward-looking statements in this material may turn out to be incorrect. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Although the assumptions underlying the forward-looking statements contained herein are believed to be reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurances that the forward-looking statements included in this discussion material will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation that the objectives and plans discussed herein will be achieved. Further, no person undertakes any obligation to revise such forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
United States: This material is for Institutional Investor use only – not for retail distribution. Muzinich & Co., Inc. is a registered investment adviser with the Securities and Exchange Commission (SEC). Muzinich & Co., Inc.’s being a Registered Investment Adviser with the SEC in no way shall imply a certain level of skill or training or any authorization or approval by the SEC.
Issued in the European Union by Muzinich & Co. (Ireland) Limited, which is authorized and regulated by the Central Bank of Ireland. Registered in Ireland, Company Registration No. 307511. Registered address: 32 Molesworth Street, Dublin 2, D02 Y512, Ireland. Issued in Switzerland by Muzinich & Co. (Switzerland) AG. Registered in Switzerland No. CHE-389.422.108. Registered address: Tödistrasse 5, 8002 Zurich, Switzerland. Issued in Singapore and Hong Kong by Muzinich & Co. (Singapore) Pte. Limited, which is licensed and regulated by the Monetary Authority of Singapore. Registered in Singapore No. 201624477K. Registered address: 6 Battery Road, #26-05, Singapore, 049909. Issued in all other jurisdictions (excluding the U.S.) by Muzinich & Co. Limited. which is authorized and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3852444. Registered address: 8 Hanover Street, London W1S 1YQ, United Kingdom. 2023-07-05-11331