Whereas most analysts currently favour government bonds and high-quality corporate bonds, Jupiter Asset Mangement also sees some areas within European high yield that will generate good returns over the next 12 months.
During an interview with FSA, Ariel Bezalel, investment manager for fixed income at Jupiter Asset Management, named a few defensive sectors that he believes will perform well.
“We could see a lot of dispersion within European high yield over time. Sectors that are more cyclically exposed like retail, chemicals and autos are going to be quite challenged as the global economy slows down over time,” said Bezalel.
“On the other hand, there are also some very defensive and robust credits which were sold off sharply last year. But when you look through the cycle, these companies should all survive quite easily.”
Falling under that category are telecoms, healthcare and gaming companies where both the top line and the bottom line tend to be relatively resilient through the economic cycle.
Another factor favouring these companies is that their businesses are secured on hard assets such as cables or premises, which tend to give creditors high recovery rates in the event of default, said Bezalel.
“It is very hard to see how you cannot get all your money back,” he added.
Moreover, when comparing defensive high-yield credits in different regions, Bezalel prefers European companies to the US as valuations are more attractive.
“I think the high yield market in America is expensive, whereas I think Europe’s high-yield market probably is about fair value,” he said.
“Europe is in a predicament because of the war on its borders with Russia and Ukraine. But it is adjusting and coping and economic activity has stabilised.”
Coping with rising default rate
Against the backdrop of a potential recession, Bezalel believes default rates will climb inevitably, but the need for most companies to refinance their debt it not so urgent this year.
Yet, the need for issuing new debt will start to pick up in the next one to two years.
“Having said this, as we enter into a very weak economic environment, leveraged companies such as chemicals, auto manufacturers or retailers may experience a drop in earnings while the amount of debt remains high on their balance sheets.”
It is also critical “right now, more than ever” for investors to buy senior secured bonds as they are higher up the capital structure, Bezalel added.
