Support for corporates from the US

Corporate bonds have enjoyed a good start to 2019. Following the substantial derating of the asset class last year, the market has rebounded as many had hoped. “Global credit markets gained crucial support from the US. The pause in interest rate hikes announced by the Fed steadied the market’s nerves. The combination of a shift away from tight US monetary policy and the persistent environment of low interest rates globally makes corporate bonds particularly attractive in the asset allocation matrix at the moment”, comments Oliver Reinhard, Senior Portfolio Manager at Fisch Asset Management in Zurich.

The recent FOMC statement had a positive impact on the USD corporate bond market. Demand promptly strengthened, including for new issues. New issues of investment grade bonds have recently been 4.5 times oversubscribed, a significant rise compared with the previous months. “This also applies to corporate bonds in USD from outside the US. We are now seeing investors react both to the improved risk/return profile and to the fact that sovereign bonds have suddenly become much less attractive. As a result, according to analysis by the investment bank Bank of America Merrill Lynch, the USD investment grade segment has enjoyed the highest weekly inflow since February 2015 – this has also contributed to steadying the market”, says Reinhard.

Alongside the investment grade segment, it is also worth taking a look at high yield bonds. After the widening of credit spreads in the last quarter, in terms of valuations high yield bonds seem to have found a new equilibrium between supply and demand. Yields in the global junk bond market have risen by over two percentage points to around 6.5% currently, which should provide adequate compensation even if volatility returns. “We focus first and foremost on quality in the high yield segment and favour BB-rated paper, where we try to identify so-called ‘rising stars’. These are companies we expect to be upgraded to investment grade in the near future. At the moment we see opportunities in the energy sector, provided the oil price does not fall below USD 40”, remarks the global corporate bonds specialist.

Fisch Asset Management is also positive on the outlook for emerging markets. “They have much stronger corporate balance sheets compared to developed markets. This is reinforced by technical market mechanisms. Record-low net new issuance by corporates means that supply/demand dynamics are healthy. Emerging markets are also benefiting from the robust economy in the US”, says Reinhard.

Within emerging markets, the Senior Portfolio Manager favours the Middle East: “This region stands out for the quality of its companies, while coupons are high compared to developed markets. We are also seeing less political uncertainty here currently than in other regions, for example in Venezuela, Mexico and Ukraine. Corporates from the Middle East can act as a stabiliser in a portfolio. We believe prospects for banks and utility sectors are particularly bright at the moment. In order to take advantage of the variety of opportunities available and avoid idiosyncratic risks, the message for corporate bonds is: go global – not local. Active management and bond picking are key success factors.”