Surely 2015 will be marked as one of the worst performances, in terms of total return for the US High yield market over the past years. Undoubtedly, the commodity sector emerged as one of the main drags for the US junk market with notable flagging pressures being noted in the energy oil related companies which traded at distressed levels, in line with falling oil prices. On the flip-side of the story, in line with improving prospects for the US economy, consumer oriented sectors recorded some solid returns.

As said from a commodity segmental perspective, amongst the prime laggards for the US High yield markets, were metals and exploration corporates, which registered a total negative return of 26 per cent, followed by the energy sector which declined by circa 24 per cent, both conditioned by the continuous dubious prospective China demand and the oil glut.

The latter argument pushed major related sector corporations towards distressed valuations. Interestingly enough, the Bank of America Merrill Lynch Distressed Credit Index shows that at the end of 2014, US90bn of the US HY market was distressed, while by the end of 2015 that figure had more than doubled to US184bn. In terms of spreads, distressed issuers are those trading at levels of above 1,000 bps.

From December 2014 to December 2015 a widening close to 200bps was recorded within the US High yield market, with about half of the spread widening attributable to the commodity weakness, while the other softness was brought about by the general negative sentiment which pushed towards a selloff in lower credit quality high yield.

On a positive note, despite oil prices weighted negatively in 2015 and are still transmitting an undesirable sentiment within global markets, lower oil prices imply lower utility bills, and thus more disposable income for households. In fact, in 2015 this was positively reflected in sectors such as food and Beverage sector which returned just above 7 per cent return, the Leisure index recorded a gain of circa 4.4 per cent and the Real Estate index which marked an appreciation of just below 4 per cent.

What about US High Yield in 2016?

Indisputably, as oil prices kicked-off 2016 at distressed levels which were last seen in 2003, further pressure on energy, industrial metals and mining corporations will be probably upheld throughout 2016, if some sort of positive momentum, primarily from the Chinese front will fail to re-appear. According to the global rating agency Moody’s, the global speculative- grade default rate is forecasted to rise to 4.4 per cent in the US, in line with further pressures within the metals and mining and oil and gas industries.

Presumably, with possible further pressures a contagious effect as occurred in 2015, might impact the overall US speculative market, and possibly result in lower valuations, as experienced last year. That said, lower valuations in sectors other than the aforementioned troubled sectors, might create an opportunity for investors to dip-in solid credit stories.

From a strategic perspective, as the US labor market continues to trend higher, yesterday positive numbers from the jobless claims, companies within the consumer discretionary sector should benefit from the said positive momentum and should offer investors favourable risk-adjusted returns.

Thus as 2016 unfolds, whereas investors should also take liquidity concerns into consideration, select niche opportunities in sectors which will benefit from a stronger US economy, such as for example the consumer staples and consumer discretionary markets, should be exploited given current valuation levels. Surely opportunities are in place for investors who are willing to take the plunge.

This article was issued by Jordan Portelli, Junior Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.  

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