Credit Continuum – February 2020

 

Recent spread widening has created potential entry points for investment grade and high yield but we remain selective

While many have compared the Chinese novel coronavirus to the 2003 SARS outbreak, the government’s reaction to contain the spread has been much quicker this time around. Market participants continue to monitor the situation closely to assess the potential longer-term impact, not only on Chinese growth but on the broader global economy. History has demonstrated an economy can recover well from a short-term impact, although a longer-term one remains more uncertain. We are however beginning to see an improvement in valuations, especially in Asian markets which we believe could offer some attractive opportunities in Chinese companies. Recent spread widening in both the investment grade and high yield markets is also presenting potential entry points in our view.

HY Spreads (LHS) & IG Spreads (RHS)¹

In terms of corporate fundamentals, fourth-quarter corporate earnings have been positive, with continued evidence of bondholder friendly activity such as ongoing deleveraging in the BBB segment of the market. Default rates have also stabilised at lower levels.

Overall, despite the potential risks created by the Chinese coronavirus outbreak, we retain our constructive stance on credit markets, which continue to find support from accommodative monetary policy and an investor base seeking yield in a low-to-negative yielding environment.

¹Source: ICE BofA ML Indices, as of 31 December, 2019. Markets represented above include: ICE BofA ML US High Yield Cash Pay Only Index (J0A0), ICE BofA ML US Corporate Plus Index (C0A0), ICE BofA ML European High Yield Constrained Index (HEC0), ICE BofA ML Euro Corporate Index (ER00), ICE BofA ML High Yield EM Corporate Plus Index (EMHB), ICE BofA ML High Grade EM Corporate Plus Index (EMIB).

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