Credit Continuum – July 2018

Headwinds have created what we believe to be more attractive valuations

Credit market performance for the first half of the year has provided some unexpected surprises with the predicted second-half sell off happening early on the back of a number of headwinds.

Among the most prominent has been the increase in aggressive US trade policy where a full-blown trade war between the US and China is looking increasingly likely; a situation that could have far reaching and unintended consequences.

The impact of the conflict-driven US administration is already being felt around the world as Trump ramps up his trade war rhetoric.

Meanwhile, the strength of the global economy appears to have already waned in some areas, while fears for higher inflation are growing – exacerbated by the recent spike in oil prices.

In China, as well as the impact of trade tariffs, we are also seeing a slowdown in growth while the government attempts to cool debt creation at the local government level, which is leading to further unease.

While the environment had increased risk aversion, on a more positive note it has resulted in what we believe to be more attractive valuations.

We also believe credit remains a compelling option given its carry. Investors, however, should be mindful of the clouds accumulating on the horizon. In short, we believe investors may be well served allocating capital to managers mindful of risk as the beta phase of the market cycle may have passed.

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Important Information

Index Descriptions

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.

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.

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 issuer exposure at 3%.

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.

EMHG – The ICE BofA ML High Grade Emerging Markets Liquid Corporate Index is the subset of the ICE BofAML Emerging Markets Liquid Corporate Plus Index, which includes only securities rated AAA through BBB3.

EMHB – The ICE BofA ML High Yield Emerging Markets Corporate Plus index is a subset of the ICE BofA ML Emerging Markets Corporate Plus Index (EMCB) including all securities rated BB1 or lower.

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