Staying positive on US high yield
Charlie Spelina, Credit Analyst, Fixed Income, discusses the performance of US high yield this year, why he sees room for further growth and what themes that may play out in the second half.
The US high-yield credit market has performed well this year. Bond issuance on a net basis is running slightly ahead of last year, and it is interesting that the number of companies issuing these bonds is the highest since 2016, though still below the peak in 1999.
There have been outflows from the asset class into the leveraged loan market, but on a net basis the high yield market has had net inflows of about $200 billion this year. The asset class is up around 4.4% this year, and now has a yield to worst, or lowest possible yield, of 4.4%, which is 385 basis points above US Treasury yields.
The best performing sectors have been energy (+11%) and transportation (+10%), while the worst performers have been cable and satellite companies and utilities, both down moderately. By rating, CCC-rated bonds, the lowest rated, are up 7% this year, single B-rated is up 4.2% and BB-rated is up 2.8%.
I am reasonably positive about the US high-yield credit market because primary issuance of bonds remains strong and the rate of companies defaulting remains very low — 1.6% this year, which compares with peak default rates of around 12%.
Higher quality companies have been able to issue high-yield debt with coupons below 3%, while lower quality companies, including those involved in leveraged buyouts, can issue below 6%. Valuations are high, however, so to my mind it makes sense to favour lower beta, or less volatile, bonds and those with shorter duration rather than longer.
In recent days, high-yield has been affected by the pullback in markets on concern that the Delta variant of Covid-19 is boosting infection rates and could undermine economic growth. This has hit some of the CCC-rated and energy credits that had outperformed earlier this year.
In addition to inflation, the key issues for the high-yield market going forward will be around the pace of economic recovery and whether growth has peaked, and the strength of corporate earnings – so far second quarter results have started well.
Undervalued China tech stocks may hold opportunities
Salman Siddiqui, Fund Manager, Global Emerging Markets Focus, says Chinese technology stocks have an opportunity to perform better in the coming months as the sector’s competitive edge and long-term growth potential are intact even after a wave of recent regulations.
Emerging markets (EM) have lagged developed markets so far in 2021. One of the biggest drags has been China, which comprises more than a third of the index. Within China, there’s a particular weakness in technology and internet names, following three waves of regulation over the last nine months.
The first wave focused on fintech and consumer lending, while the second wave focused on anti-monopolistic practices within the large online platform businesses including e-commerce and food delivery. In our view, we are close to the end on the anti-monopoly set of regulations.
The most recent wave of regulation has centred around data protection. What the Chinese regulator is trying to do has similarities to GDPR in the EU. Data can be collected, but should be limited to a company’s relevance, and companies also need to ensure that they have proper controls and cyber security in place to protect that data. The government also wants to ensure that it has access to data it deems to be particularly sensitive.
The primary objective is not to stop firms from growing or to stop them monetising their platforms. We don’t see these regulations as taking away the competitive advantage or the long-term growth potential of the internet platforms that we own.
Over the last few months, FAANG stocks continue to hit all-time highs while Chinese names languish. So we think there could be a real opportunity over the next 12 months for China technology stocks and also EM more broadly.
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