Credit Continuum – August 2020

 

Losing Momentum!

In an uncertain environment, credit selection can be key to distinguish companies that will survive from those who will not.

The credit markets’ upward trajectory continued during July, and at the time of writing, also through August. We expected issuance to pause during the summer period, but instead we have seen record levels particularly in the US High Yield market, where year-to-date we have seen a significant  increased compared with the same period last year.

The market has, so far, continued to absorb the new issuance as there is strong appetite for credit, with bond prices being supported by central banks, and investors still believing corporate credit can offer value relative to the low absolute level of sovereign yields. In our view, September will be critical in assessing the market capacity to absorb this flow of new issuance.

Default rates expectations have come down too, as companies are able to come to market to add liquidity and strengthen their balance sheet. We have witnessed a divergence between the US and Europe, as the most affected sector is energy/commodities, which represents a large portion of the US high yield market, which is not the case for the European high yield market.

We believe there is a risk of the economy losing momentum in the next few months so further fiscal support will be needed. Looking at the next round of fiscal measures a different picture emerges on each side of the Atlantic. In the US, the agreement for further fiscal stimulus seems to be halted due to the upcoming US presidential election, with Republicans and Democrats not being able to agree on additional measures. By contrast, in Europe, an agreement was reached in July after intense negotiations on the European Recovery and Resilience Fund.

The Recovery Fund is generally regarded as a milestone achievement in the response to COVID-19 related economic threat, and we believe it indicates confidence in a more resilient Eurozone.

We have seen in the last few weeks high yields and tighter spreads across Investment Grade and High Yield markets and while valuations remain attractive, in our view,  the economic outlook remains uncertain. This is not the V-shaped recovery investors had hoped for. Companies will need liquidity to survive the coming months. There seems to be a bifurcation between companies that have the balance sheet strength to survive in this environment and those who have not, in our opinion.  We believe this calls for a good assessment of the companies and credit selection will be a key element to distinguish the ‘winners’ from the ‘losers’.

————————————————————————————————————————————-

Important Information

Muzinich & Co. referenced herein is defined as Muzinich & Co., Inc. and it’s affiliates. This document 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 results do not guarantee future performance. 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. This document and 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. Opinions and statements of financial market trends that are based on market conditions constitute our judgement as at the date of this document. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. Certain information contained in this document constitutes forward-looking statements; due to various risks and uncertainties, actual events may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained in this document may be relied upon as a guarantee, promise, assurance or a representation as to the future. All information contained herein is believed to be accurate as of the date(s) indicated, is not complete, and is subject to change at any time. Certain information contained herein is based on data obtained from third parties and, although believed to be reliable, has not been independently verified by anyone at or affiliated with Muzinich and Co., its accuracy or completeness cannot be guaranteed. 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. In Europe, this material is issued by Muzinich & Co. Ltd., which is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3852444. Registered address: 8 Hanover Street, London W1S 1YQ. Muzinich & Co. Limited. is a subsidiary of Muzinich & Co., Inc.  Muzinich & Co., Inc. is a registered investment adviser with the Securities and Exchange Commission. Muzinich & Co., Inc.’s being a registered investment adviser with the Securities Exchange Commission (SEC) in no way shall imply a certain level of skill or training or any authorization or approval by the SEC.