As the global economy recovers from the pandemic, individual company earnings and cashflows are expected to continue to improve.
However, with rising inflation, sovereign bonds and “very high quality” investment grade bonds are expected to generate negative returns, said Pictet Wealth Management.
The Swiss wealth manager told a media briefing that it prefers high yield credit in Europe and the US, but investment grade bonds in Asia, as well as China government bonds.
Since 2020, Europe and US have seen fallen angels from investment grade to high yield due to tight cashflows and worsened earnings.
But Pictet is now seeing a reverse of the situation, with the number of upgrades exceeding downgrades since the beginning of 2021.
“When identifying the rising star, investors have to look at which sector is likely to improve in terms of cash flow, and which company within that sector is going to improve. If you have a team of credit analysts who actively engage with those companies, usually you can see those companies before the ratings have been upgraded,” said Alexandre Tavazzi, global strategist, head of CIO office and CIO Asia, Pictet Wealth Management.
“Among all the economies, we see most of these companies in the developed markets, such as Europe and in the US, and they have already picked up their pace in 2021,” he added.
Asia credit
In Asia, Tavazzi recommends investors to be very specific with country selection, as not all economies are recovering.
Moreover, as Chinese property giants, such as Evergrande and Kaisa, have defaulted this week, Pictet believes the sector is still an area of concern in the year to come.
But with greater volatility and fewer investors willing to participate in the market, Tavzzi thinks the pricing of some better quality Chinese property credits could provide an opportunity for active investors
