Global corporate bonds: good reasons for optimism

Oliver Reinhard, Senior Portfolio Manager at Fisch Asset Management, considers the current market environment very constructive for corporate bonds: “Corporate balance sheets and key metrics are largely positive, providing a strong foundation for the corporates market. Although the current level of credit spreads appears expensive at first glance, credit quality has improved significantly in both the investment grade (IG) and high-yield segments. In addition, the rise in interest rates has reduced the overall duration of credit markets, making a direct comparison with historical spreads less meaningful. Others share this view: A recent study by J.P. Morgan shows that the proportion of A-rated bonds in the IG universe has increased to 45.3%. This is the highest level since the end of 2011. From a technical perspective, credit markets are also being supported by fund inflows. Furthermore, many issuers have already refinanced themselves through new issues in the first half of the year. As a result, the supply/demand ratio should develop in favour of excess demand and provide further tailwind for credit spreads.”

Reinhard further notes: “Looking at the macroeconomic picture, the soft landing anticipated by the market in the US, the slow economic recovery in Europe, combined with moderate interest rate cuts by central banks and lower inflation, contrive to have supportive effects. Currently, we prefer bonds from the eurozone over USD-denominated bonds due to higher credit spreads and more attractive yields on a EUR-hedged basis. Fundamentally, we do not see significant differences between the two main markets. In terms of sectors, pharmaceuticals, financials, and energy have been among our top picks for some time.”

More careful positioning in second half of 2024

Despite the solid environment, managing bond allocations is likely to become more challenging. Due to the increased valuations, the buffer against setbacks from market and/or geopolitical events is reduced. Matthias Busuttil, who co-manages the FISCH Bond Global Corporates Fund with Oliver Reinhard, explains: “In the second half, we recommend adopting a more defensive positioning compared to the first six months of the year. High-quality bonds, such as the IG segment, should be overweighted in a mixed bond portfolio. High-yield bonds also offer opportunities, but these should be approached selectively. The CCC-rated segment remains difficult to navigate given challenging idiosyncratic situations and is therefore better avoided. The credit quality BB and large parts of the crossover segment at the boundary of IG to high yield remain attractive. Despite a compression of credit spreads here, we still identify new ‘Rising Stars’ – issuers on the verge of being upgraded to the IG universe, presenting opportunities for price gains.”

Emerging markets remain interesting within the bond universe, offering higher coupons with similar risk compared to EUR and USD bonds. “Emerging markets are also appealing from a market technical perspective. In the first half of the year, the market saw fewer new hard currency issues with demand being stable. Moreover, fundamental data in these markets is sometimes even better than in industrialised nations. From a valuation perspective, Latin American bonds are preferred over their Asian counterparts. In emerging markets too, a higher weighting of IG over high-yield bonds is advisable to better absorb potential risks,” says fund manager Reinhard.

A decade of FISCH Bond Global Corporates Fund

The FISCH Bond Global Corporates Fund celebrated its 10th anniversary at the end of June. The management team invest globally in liquid corporate bonds in hard currencies. The main focus is on the Investment Grade segment, which always constitutes at least two-thirds of the portfolio. The fund's uniqueness lies in its inclusion of high-yield bonds and the emerging markets universe. “This flexibility allows us to achieve high diversification and agile management across different segments, providing investors with comprehensive exposure to the corporate bond universe in a single investment solution,” says Busuttil. The strategy currently has approximately 700 million euros in assets under management and offers three currency tranches in EUR, USD, and CHF — catering to both institutional and private investors.