“There may be some aversion to [bank loans] based on their poor performance during the financial crisis [of 2008]. That outcome was due to distinctly unique circumstances which embedded bank loans at the epicenter of the crisis and forced the unwinding of assets by leveraged investors,” Oh noted.
He is of view that such conditions are not in place today. He said that the seniority and security of bank loans should result in a more resilient outcome under a credit market downturn while outperforming through a rate normalisation process.
“We must look to the past for lessons, but recognise that the future will be different, and position portfolios for the next set of market challenges rather than the past ones,” Oh said.
Commenting on emerging markets corporate bonds, Oh said that returns tend to be idiosyncratic in nature and driven more by credit cycles as opposed to interest rate cycles. He is of opinion that industry watchers are likely to redefine the boundaries of emerging markets.
“We believe [that] there will be substantially greater differentiation in emerging markets across regions, sectors and countries as investors continue to gauge the impact of lower commodity prices, significant foreign exchange movements and divergent reform policies,” he said.
Oh recommended that investors add allocations to bank loans and emerging markets corporate bonds – segments that are typically underrepresented in many portfolios.
“Bank loans have performed well historically well in past tightening cycles. We believe that it will be the most favourably positioned asset class over the intermediate term, offering excess risk-adjusted spreads in addition to defensive characteristics within the below investment grade segment,” he said.
