Medium term valuations in credit appear very compelling. However, credit markets have yet to establish a clear bottom as policy makers struggle to contain the economic fallout from rampant de-leveraging, still falling house prices and limited demand for distressed assets.
- Overweight Investment Grade, Underweight High Yield. Deleveraging and high yields in a world of low nominal returns produce attractive risk-adjusted and relative return prospects for corporate bonds. We favour investment-grade credits at present but would look to extend into high-yield as the economic and financial environment stabilises.
- Underweight BBB cyclicals. Tight credit conditions and funding pressures are likely to weigh on levered companies that are vulnerable to a cyclical economic slowdown.
- Overweight more defensive sectors. Stable cash flows and limited financing requirements should continue to benefit Consumer Product, Healthcare, Defence, Telecom, Utility and Energy companies.
- Modest Financial sector overweight. Durable and comprehensive government support will likely result in substantial issuance, but also makes the sector more defensive relative to non-financials.
- Take advantage of the new issue calendar. In the early stages of a credit cycle, the strongest companies usually issue debt on favourable terms for investors. Additionally, the wide basis of cash bonds over CDS offers an added benefit.