It is difficult to dichtomise investment grade and high yield, as the sweet spot at the moment is very much in the double B to triple B space, according to Henry Loh (pictured), head of Asian credit at abrdn.
There has been no shortage of asset managers who have said this year that fixed income is back, as all-in yields are at their most attractive level for decades and despite spread compression, investment grade is very much consensus at the moment.
Loh postulates, however, that rather than thinking in binary terms of investment grade and high yield, investors should focus their attention on where they can get the best overall returns as well as income, and here the double B to triple B segment makes the most sense.
“I would say it’s very hard for me to say investment grade versus high yield because the way we’re thinking of the world today is very much looking at that triple B, double B segment. We like that space,” said Loh.
“You might not see as much spread compression today but really building up a core portfolio of strong carry candidates, I think is going to be key, not only in supporting overall returns but generating some income as well.”
Notwithstanding the consensus in favour of investment grade, the Bloomberg Barclays Global Aggregate index has fared poorly this year, generating a total return of -2.48% compared with a 3.03% return for the Bloomberg Barclays Global High Yield Index.
This is primarily a function of the fact that spreads have tightened so much for investment grade that the movement in Treasury yields has become an even larger factor in determining total returns.
Within high yield, Asia has fared even better due to a combination of improving fundamentals with a number of the distressed issuers from previous years now weeded out and a better technical market environment — primarily a lack of issuance across the board.
Insofar as Loh has any calls in favour of high yield, this is very much in line with broad consensus, such as Indian renewables, Macau gaming and subordinated bank debt.
He is wary generally of some of the calls in favour of investment grade because of the difficulties in managing duration, which has been particularly volatile in the past few months given shifting expectations around the timing of interest rate cuts.
Overall, Loh notes that investors are starting to move out of cash and re-engage with fixed income, although he notices that there is still a high degree of reluctance as they look to time the market to coincide with interest rate cuts, which is something he opposes.
“My pushback has always been that if you wait for that first rate cut, markets are forward pricing, but once that trajectory starts to change the markets will move and you will be a few steps behind,” he said.
