The credit analysts’ view
The credit analysts’ view
Jupiter’s fixed income capability benefits from the expertise of a large team of Credit Analysts. Here, we look at their latest insights from three sectors.
Jupiter’s fixed income capability benefits from the expertise of a large team of Credit Analysts, who devote themselves to understanding the subtle dynamics of individual sectors, as well as conducting detailed due diligence on issuers and individual issues. Their work is closely integrated with that of our investment managers, influencing credit selection across all Jupiter’s fixed income strategies. Here, we look at their latest insights from three sectors.
Real Estate sector
Leon Wei, Credit Analyst, Fixed Income
Leon Wei, Credit Analyst, Fixed Income
Real estate continues to be a sector where we see pockets of interesting opportunities. The end of loose monetary policy and the accompanying rapid rise in interest rates have placed pressure on the real estate sector as a whole, where previously elevated property valuations are now on a downward trend, and many issuers within the sector no longer have the unimpeded access to cheap debt financing they used to enjoy. Consequently, this has led to high degrees of investor pessimism towards the sector, sometimes creating opportunities particularly from a credit perspective.
Since late 2022, during several bouts of market volatility, we have seen lowly-levered and fundamentally defensive investment grade real estate bonds trading at levels akin to high yield credits and have taken advantage of some these opportunities in situations where we see superior risk/reward. From a credit selection perspective, we favour real estate issuers with great degree of financial flexibility, typically supported by ample liquidity, high levels of unencumbered assets, and manageable maturity profiles. We also pay close attention to the underlying issuers’ earnings stability and level of fixed rate debt within the capital structure, which tend to inform the issuers’ ability to generate free cashflow.
Relating to governance, we prefer issuers with supportive shareholders, as well as those issuers exhibiting creditor-friendly behaviours. Positively in this regard, in recent months, several of the companies in which we invest have made announcements to repurchase their own bonds at steep discounts, which are credit accretive. Overall, we continue to remain selective and fundamental-focused within the space, and we view real estate as a sector which could benefit, should the world eventually enter a falling rate environment.
Since late 2022, during several bouts of market volatility, we have seen lowly-levered and fundamentally defensive investment grade real estate bonds trading at levels akin to high yield credits and have taken advantage of some these opportunities in situations where we see superior risk/reward. From a credit selection perspective, we favour real estate issuers with great degree of financial flexibility, typically supported by ample liquidity, high levels of unencumbered assets, and manageable maturity profiles. We also pay close attention to the underlying issuers’ earnings stability and level of fixed rate debt within the capital structure, which tend to inform the issuers’ ability to generate free cashflow.
Relating to governance, we prefer issuers with supportive shareholders, as well as those issuers exhibiting creditor-friendly behaviours. Positively in this regard, in recent months, several of the companies in which we invest have made announcements to repurchase their own bonds at steep discounts, which are credit accretive. Overall, we continue to remain selective and fundamental-focused within the space, and we view real estate as a sector which could benefit, should the world eventually enter a falling rate environment.
Telecommunications, Media, and Technology
Andrew Rubins, Credit Analyst, Fixed Income
Andrew Rubins, Credit Analyst, Fixed Income
We believe that the Telecommunications, Media, and Technology (TMT) sector currently offers attractive investment opportunities in Fixed Income. Although it’s a broad sector, our favoured opportunities tend to be concentrated in telecommunications, specifically, fixed broadband and mobile providers. We find the defensive nature of this sub-sector, its strong fundamentals and stable and / or improving cash flow generation, despite heavy investment cycles, as attractive characteristics.
We prefer companies operating in mature, developed markets, like the UK, the Netherlands and France, where operators behave rationally, user bases are large and customer churn is relatively low, as well as those operators in more emerging markets, like countries in Eastern Europe, where operators are experiencing faster growth, driven by increasing ARPUs and penetration. We prefer the secured bonds of those companies that own their infrastructure assets, such as the cable / fibre network, towers, or data centres, amongst others, which are valuable and provide strong asset coverage at relatively low leverage points. The tranches of these bonds tend to be large and liquid, aiding our flexibility in trading these names.
Finally, digitalisation is more important than ever because businesses urgently need to innovate, reconfigure, and transform in response to dynamic market conditions and emerging technology, such as artificial intelligence, which again provides attractive investment opportunities.
We prefer companies operating in mature, developed markets, like the UK, the Netherlands and France, where operators behave rationally, user bases are large and customer churn is relatively low, as well as those operators in more emerging markets, like countries in Eastern Europe, where operators are experiencing faster growth, driven by increasing ARPUs and penetration. We prefer the secured bonds of those companies that own their infrastructure assets, such as the cable / fibre network, towers, or data centres, amongst others, which are valuable and provide strong asset coverage at relatively low leverage points. The tranches of these bonds tend to be large and liquid, aiding our flexibility in trading these names.
Finally, digitalisation is more important than ever because businesses urgently need to innovate, reconfigure, and transform in response to dynamic market conditions and emerging technology, such as artificial intelligence, which again provides attractive investment opportunities.
Healthcare sector
Andrew Rubins, Credit Analyst, Fixed Income
Andrew Rubins, Credit Analyst, Fixed Income
The European Healthcare sector currently offers attractive investment opportunities in Fixed Income, in our view, even though it’s made up of many different industries from pharmaceuticals, biotechnology and devices to health insurers and hospitals. Generally, the sector is supported by several fundamental near- and long-term growth drivers including an ageing population in both developed and emerging markets, an increase in age-related diseases, the global reach of disease, increasing demand from the younger population due to more active lifestyles, personalised medicine, technological advances in surgery, materials, 3D printing, shifts to outpatient settings, smaller players gaining market share and accelerated growth driven by postponed but not cancelled surgeries over COVID-19.
From a credit perspective, this diverse sector has proven to be stable, resilient, largely anti-cyclical and defensive in nature. We target those companies with visible growth drivers, high margins, and strong cash flows. We prefer to invest in the debt of businesses that benefit from high trading multiples and low leverage, which imply large equity cushions and offer downside protection. Sub-sectors that we favour include laboratory / testing businesses, specialty pharma, and medical devices. We have also targeted certain special situations where companies are in a turnaround phase, rationalising their portfolios, improving operations and their balance sheets and deleveraging. Historically, the sector has been one of the strongest performers in late cycle and recessionary periods, which is why we like it at this juncture amid uncertainty over the broader macroeconomic outlook.
From a credit perspective, this diverse sector has proven to be stable, resilient, largely anti-cyclical and defensive in nature. We target those companies with visible growth drivers, high margins, and strong cash flows. We prefer to invest in the debt of businesses that benefit from high trading multiples and low leverage, which imply large equity cushions and offer downside protection. Sub-sectors that we favour include laboratory / testing businesses, specialty pharma, and medical devices. We have also targeted certain special situations where companies are in a turnaround phase, rationalising their portfolios, improving operations and their balance sheets and deleveraging. Historically, the sector has been one of the strongest performers in late cycle and recessionary periods, which is why we like it at this juncture amid uncertainty over the broader macroeconomic outlook.
The value of active minds – independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
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