Another month passed by and yet another positive month for risky assets across the spectrum. One would not have been at fault at presuming that, following the positive start to the year we had in the first quarter, sell-offs would take centre stage in April.
And to a certain extent, April did have its fair share of bouts of heightened volatility as well as trading sessions whereby investors were swift to take profits, resulting in muted weakness. Overall, April was once again a positive month for credit and risky assets, with spreads on high yield bonds across both sides of the Atlantic tightening further.
It must be said that the euphoria we had seen in the first three months of the year seemingly dissipated in April, but was nonetheless strong enough to clock in yet another positive month. No major news updates. No particular surprising economic data releases, but merely an extension of the positive sentiment bolstered in January by the ECB and US Federal Reserve.
With earnings season in full swing, investors had much to scrutinise, but there were no major surprises; corporates remain in good shape, earnings robust, and more importantly, balance sheets remain healthy.
US corporate balance sheets are more leveraged than their European counterparts as the QE trade lasted longer in the US than it did in the eurozone.
With benchmark yields in Europe markedly lower, and with credit better bid for the better part of the year so far, we have seen a fresh wave of bond issuers, particularly the higher yielding ones, take advantage of market conditions by refinancing their outstanding bonds at significantly lower borrowing rates, a trend which was almost inexistent in 2018.
April saw a marked rise of bond issuers, even within the Emerging Markets space, redeem or tender their debt before the scheduled maturity date. The most recent examples being Eircom, the Irish telecoms operator in euros and JBS, the Brazilian meat producer, calling or tendering their bonds early.
The marginal strength in the US dollar during the month did little to derail sentiment in EM economies, sending credit spreads within the EM space markedly tighter.
With markets now more than ever expecting a long pause in central bank activity, or even possibly rate cuts at best, the euro and dollar are expected to range trade and provide some form of stability for EM economies. This bodes well as EM economies and subsequently credit as economic conditions are still favourable for EM corporate debt.
Disclaimer:
This article was issued by Mark Vella, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view 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.