Where do you see the key income opportunities for investors amid so much market dislocation?
We can find income across pretty much the whole opportunity set which is pretty exciting given the yields we have become used to over the last decade. What we like most is asset classes that have solid fundamentals, where active managers can select issuers with low default risk, and where they are oversold in the recent turmoil. CoCos are top of that list.
What are the drivers of compelling yields, and where can these be found?
CoCos have been affected like all of fixed income by higher yields as central banks have tightened driving fixed income yields higher. Secondly, we’ve seen recession worries and tighter policy drive spreads higher. We think recession worries have caused investors to sell bank debt, because they’re fighting the last war: while the global financial crisis was at heart a banking crisis, it’s very unlikely to be that way this time. Banks are much much stronger and better regulated. That means that CoCos now offer a compelling yield for relatively little underlying risk.
How should investors weigh risks in terms of different fixed income instruments in today’s global credit landscape?
Today, you need to be active because there will be winners and losers in a global recession. Pick the issuers with strong balance sheets, own the issues that are likely to do best in a slowdown. If you can do that, and own a portfolio with very compelling yields that can get through the downturn, there are strong returns to be made.