Against a tough backdrop for fixed income markets, with worries about inflation mounting, investors should embrace credit from parts of the world where it is well-rewarded.
The fundamental support for credit will rarely be more positive than at the beginning of a cycle, explained Mark Holman, chief executive officer and portfolio manager at TwentyFour Asset Management. He said this is reflected today in factors such as low interest rates, fiscal stimulus and companies resuming business operations.
As a result he forecasts low default rates globally. “I expect to see twice as many upgrades in the US than downgrades, so the backdrop for credit is attractive,” Holman added.
Finding relative value
Investors can find yield through exposure to specific credit opportunities.
“We think about relative value and where we are in the cycle, and then will construct the portfolio accordingly,” explained Holman.
Asian credit, for example, remains a structural way to take advantage of the relative value story, according to Aman Dhingra, head of advisory for Union Bancaire Privée (UBP) in Singapore.
Indeed, the appeal of unconstrained managers is strong among wealth managers broadly, including for UBP, as well as TriLake Partners. They see this as a way to be more tactical and opportunistic to maintain required returns in client portfolios.
One route is investing in Chinese bonds. “We find value in Asian bonds and have a firm conviction in Chinese government bonds,” said Noli de Pala, TriLake’s chief investment officer.
Dhingra, meanwhile, is focused on renminbi-denominated policy bank and government bonds. “We think the spreads are more compelling and we have a stable view on the currency.”
Rong Ren Goh, portfolio manager at Eastspring Investments in Singapore, agrees that China government bonds offer some of the best yield-pick-up opportunities among the higher quality sovereigns. They also look like having a tailwind due to the bond index inclusion story, he added.
Backing high yield bonds
Going a bit further down the credit curve, opportunities in the high yield space, especially in Asia, appeal to Goh. “We believe the credit cycle has bottomed out, and high yield corporate bonds are supported by a very strong global economic recovery.”
This also offers another route to China, he added, given that Chinese property names comprise the majority of this segment.
Also benefiting the outlook for Asian high yield is the fact that its average duration is short – a feature of these bonds which can help investors to mitigate inflation risk and maintain capital stability without compromising target returns.
Staying in the high yield space, Dhingra says the US recovery story has put US high yield on his radar. Although the spreads are not as attractive as in Asia, he expects them to remain steady.