In our job, it is not uncommon for us portfolio managers to have regular conversations between us, to bounce off ideas and views about the market. Tactical decision making and portfolio construction techniques differ between one asset manager and the other, as each will have their distinct management styles; and that is perfectly normal.

As are the views and tactical positions as well as analytical tools used in day to day management – this is what distinguishes one asset manager from another, and essentially what results in differing portfolio performance between one asset manager and the other, one fund and the other, one investment house and the other. We are of the opinion that it is healthy to bounce off ideas with our peers, we strongly believe that it is part of our learning curve.

One of the recurring themes we have been talking about over recent months with fixed income asset managers is the robustness of credit markets in general, particularly the riskier part of the spectrum such as High Yield and Emerging Market credits, and the remarkable performance registered so far during the first six months of 2017.

2016 had started off on a significant weak tone, with credit markets recovering strongly in Q2, Q3 and Q4 last year. Few would have expected H12017 to be as benign as the past 6 months have been. As at the time of writing European HY rose by 4.44%, US HY rose by 4.72%, Global HY increased by 4.67% and Emerging Market credit rallied by 4.96%.

In January, the relative expensiveness of valuations and tightness of spreads had shaped asset manager’s strategic and tactical allocations for an increased preference towards cash holdings, only to realise that they had been missing out on the rally witnessed in the first few months of this year.

That realisation led to new flows pouring into the asset class as investors became increasingly aware that company balance sheets were healthier and the weaker US dollar provided a supportive background for emerging market issuers.

Bond issuers refinanced at lower levels, and hence lowered their finance costs whilst at the same time extended the bond maturity ladder, so investors were nonetheless compelled with the urge of wanting, or rather needing, to generate returns in a market which was already tight but with bond issuer’s credit profiles markedly better. We would not call it complacency this time round, more of a general feeling that there has been nothing worthy of derailing credit markets so far.

The trump trade is slowly fading, the dollar has weakened, both US and European economies appear to be healthy (although inflation and wage growth remain rather sticky) and neither geopolitical tensions nor election season have had the prowess to add any form of weakness in the market so far.

So the question we ask ourselves is…what next for the remainder of the year? In all fairness, particularly in the US HY market, we have had a taste of some weakness with the 19% decline in the price of oil in Q217. However, this decline has so far been relatively well contained and there has, so far, not been any marked contagion into other commodities.

The medium term effects have not yet been felt in the global economy so that could be one theme to look out over the coming months, as is the reaction of other commodity prices. Q2 earnings season is expected to kick start in a few days’ time so that too will be key, especially in the expected lull of the summer months. Is it still too premature to be taking risk off the table for the time being?

Potentially yes as markets are expected to trade relatively sideways in the first couple of months of Q317, thereby further exacerbating the importance of the carry trade, but lightening up towards the end of summer might not be a bad option to consider, even if it might come at the cost of minimal bps in performance.

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.