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Credit markets - the importance of active management

The debate at which point of the cycle credit markets are positioned continues to be an important discussion amongst market participants.

Indeed, the bull credit market maintained its sustainability primarily through the support of major Central Banks, which flooded markets with liquidity in order to combat the lack of economic growth.

The question being posed is how credit markets will react once Central Banks will further tighten their accommodative stances.

Theoretically, as more tightening takes place, volatility is set to increase. However, as I have opined in various writings, the higher dispersion will undoubtedly create opportunistic venues for issuer selection.

Certainly, there is consensus amongst credit market participants that we are at the peak of the cycle, but from this point forth it is difficult to identify at which point of the peak we stand, as markets can uphold to a peakish point for a while.

Thus, the importance for opting for an active strategy rather than a passive one is imperative.

In our active management vision, we look at three main pillars; fundamentals, valuations and technicals, with our main focus on the first two. The fundamental approach is a key starting point in bond picking.

We believe that at this juncture, fundamentals are indeed favouring credit markets through the synchronized global growth. In layman terms, all else being equal, an improving economy will sustain debt servicing and financing.

That said also here one should tread with caution given the tight labour markets in the US and the deficits issues. Despite Europe might be better positioned in terms of economic outlook going forward, a slowing US would certainly affect other regions, including Europe.

When looking to the valuation pillar, as a credit Portfolio Manager, no matter which way you look at it, credit markets are expensive across all rating categories.

That said selectively you might get some extra spread compared to other regions. In fact, the recent volatility has indeed created some interesting venues, which were offering extra spread.

The beef sector in Brazil is a case in point. I still perceive that given the slight improvement in Brazil, in addition to recent consolidation within the sector through acquisitions, is a big plus for credit participants in generating returns.

In Europe, as opposed to previous years, from a valuation perspective financials might still offer some value. In fact, in a rising interest rate scenario, financials should be one of the mechanics used in form of natural hedge.

Indeed, when interest rates increase, profitability for financials should increase, banks should be faced by falling levels of non-performing loans and thus stronger balance sheets.

Thus given a benign economic outlook, which however is being dampened by the unpredictable statements put forward by Trump, which are indeed triggering volatility, active management is surely a preposition investors should consider.

Credit markets, primarily high yield, need to be dealt with diligence and in periods of volatility the attractiveness of selective names might be a venue for investors to generate higher returns. Indeed, ensuring that your Portfolio Manager is being active is crucial for market outperformance going forward.

Disclaimer: This article was issued by Jordan Portelli, 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.

 

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