The third quarter of 2017 ended just as it had begun – credit rallying, spreads tightening, demand for High Yield bonds remaining well intact, and Emerging Market credit marching on.
US High Yield rose by 2% in Q3 '17, European High Yield by a satisfactory 1.75%, and Emerging Market Credit in hard currency posted a remarkable 2.95% during the summer.
It seems that not even the flurry of action in the primary market towards the end of August and throughout the better part of September was enough to derail the rally we have seen so far this year in credit. In September alone, US high yield, European high yield and emerging market bonds returned 0.89%, 0.54% and 0.85%, respectively.
We had predicted that – bar any major geo-political event, a marked slowdown in the US or an abrupt end to QE in Europe – we saw little scope for the rally in global credit to slowdown, and here we are at the end of September with yet another solid quarter of performance in the bag.
With or without any concrete announcement regarding tapering in Europe nor time for the next US rate hike, demand for high beta sectors both across both sides of the bond as well as Emerging Market credit remained robust and appeared to be the better investment alternative for global investors. These sectors have in fact spearheaded the rally in credit we witnessed for the better part of 2017
Heading into the last quarter of the year, investors have nine months of solid performance to enjoy and hold on to, across the various credit asset classes. Thus far, credit has managed to withstand a number of hurdles, namely geo-political events, elections, mixed data signals, but the biggest test is yet to come at the crucial October ECB meeting. Here, the largest risk is that ECB’s Draghi announces an abrupt halt to the highly successful QE program, disrupting what can be described as a controlled rally in credit. The market is more inclined to believe that some type of announcement of the reduction in QE is imminent, so we would not be ruling out any weakness from this point forth, as investors look to protect year-to-date gains.
The final earnings season of the calendar year is imminently upon us, and together with the key central bank meetings left for the remainder of 2017, markets will also be looking at key economic data in an attempt to grasp the health of both the European and US economies, not only to devise how markets will shape up in the last months of 2017, but, more importantly, how to position investment portfolios best in 2017. The first 4-6 weeks of Q4 '17 are crucial for tactical positioning as heading into the last stretch, liquidity in markets begin to slowly fade come December.
Disclaimer:
This article was issued by Mark Vella, 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. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.