Credit markets recoup but pressures persist
Credit markets continue to be pressured by a more hawkish tone by leading Central Banks, but also by the wider picture of geopolitical tensions, such as the continued uncertainty surrounding the trade war preposition.
In July, to a certain extent, trade tensions seem to have eased and markets reacted positively.
It is also to no surprise that in July emerging market bonds emerged amongst the best performers as the recent outflow from the region was, in our view, an overreaction.
Hard currency emerging market bonds registered a gain of just below 1.8% as investors opted to take advantage of the opportunity by dipping in at very attractive levels.
European High yield was another segment within the asset class which managed to gather momentum with gains of 1.4%. Investors still believed that the pace of interest rate hikes in Europe will be a very slow one, beyond August 2019, if any. Thus, the recent yield movements’ mere mainly brought about by the market volatility in general.
US High speculative debt also gather momentum by recording a 1.3% monthly gain, a move in line with a relatively uptick in the risk-on mode.
As we’ve been stating over the past months, credit markets are expected to experience a bumpy ride, as witnessed in the first half of the year. People are now more uncertain than ever about the outcome of amongst others trade wars and this indeed lowers the degree of confidence.
The current situation is one as described by John Maynard Keynes, a situation of ‘animal spirits’-confidence driven by human emotions.
We are of the view that the credit cycle is peaking, but at which point of the cycle we are currently at is a true unknown. In addition, we are of the view that different regions are at different points on the credit cycle. What is certain is that, this time round, credit markets are being conditioned from a twofold perspective.
Primarily, the view of tighter monetary policy across the board is surely a theoretical view that one should give certain weight. Secondly, it is no secret the high yield debt holds a high correlation with the equity asset class, and thus the volatility being triggered by the geopolitical tensions is another negative for the bond market.
That said we believe that pockets of opportunities will still be in place. In this regard, I reiterate the necessity of opting for a bottom-up approach by deeply analysing a company’s cash flow sanity and thus its ability to service its debt.
Undoubtedly, strong credit names are not and will not be infinitely immune to market volatility and we have to accept the fact that at times markets do act irrationally.
However, what is certain is that when such names sell-off irrationally due to macro elements, these will recoup at calmer waters. Our concerns would be specific risks surrounding a name, which specific risk can escalate further given a move in the macro environment.
Our message for investors is to be more patient and accept the fact that volatility is the order of the day. Do not panic, do not dump your investment because your position is down 3%, be rational by being more selective. Your investment objective can still be achieved within financials market. We strongly believe that volatility does indeed create opportunities.
Disclaimer: This article was issued by Jordan Portelli, 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.