IG Corporates remain attractive given strong fundamentals and a favourable outlook for rates

Resilient economic growth in the US and sticky inflation have diminished investors’ rate cut expectations, creating a challenging short-term environment for bonds markets. “Despite delays in the easing cycle, the final destination remains unchanged, with inflation moderating and the Fed poised to cut rates. This continues to make high-quality bonds look attractive, as they are well able to withstand an economic slowdown”, says Matthias Busuttil, portfolio manager at Fisch Asset Management in Zurich.

This year’s dominating topic has been the continued pricing out of the anticipated rate cuts by the major central banks in the face of higher-than-expected growth and stubborn inflation, explains Busuttil, who manages the FISCH Bond Global IG Corporates Fund: “However, inflation should moderate over the medium term, with softer economic activity allowing central banks to tone down the level of restriction. In our view, the current term structure of rates underestimates the pace of easing by around two rate cuts, i.e. 50 basis points, should inflation moderate from current levels over a one-to-two-year horizon. This premium, in turn, offers an adequate compensation if inflation remains sticky and the easing cycle is delayed further. Such periods of transitions bring their own set of challenges for investors in terms of asset allocation.”

Strong fundamentals and favourable rates outlook

History shows that investment grade (IG) companies are particularly well insulated against a downturn. First-quarter financial results have confirmed the strong fundamentals of IG issuers, which makes a decisive widening of spreads an unlikely scenario. Oliver Reinhard, who manages the fund together with Matthias Busuttil, explains, “This makes the asset class a suitable investment at this point in time, in our view, with very attractive absolute yields of 5.5% in USD-hedged and 3.9% in EUR-hedged terms and the potential of capital gains when rates start declining.”

Market technicals are supportive

So far this year, IG companies have issued around 30% more compared to the same period of last year, taking advantage of healthy demand in the primary market. Funding needs are projected to be close to last year’s levels, which implies that the pace of new bond supply will slow down in the second half of the year. As for demand, barring any sharp shocks in rates, fund flows are likely to maintain the current positive pace. Therefore, underlying market technicals should continue to support credit spreads.

Busuttil adds: “In our view, it makes sense for investors to start adding to their IG corporates allocation, taking advantage of any dips in the market. In our portfolio, we favour non-cyclical sectors, which typically outperform their cyclical counterparts in a cooling economy. We find healthcare particularly attractive following a period of high issuance volumes on the back of M&A activity, which has led to some underperformance and we expect further catch-up potential. We also like banks, which continue to offer attractive relative value compared to industrials. Banks’ balance sheets have strengthened, with improved profitability supporting capitalisation levels. Moreover, with unemployment levels expected to remain low, we do not expect a meaningful build-up in loan-loss provisions.”

Third anniversary of the FISCH Bond Global IG Corporates Fund

The FISCH Bond Global IG Corporates Fund celebrated its three-year track record in April. It is one of Fisch’s seven corporate bond funds and invests globally in liquid investment grade corporate bonds in hard currencies. The portfolio is broadly diversified across regions and industries, with the ability to take advantage of opportunities that arise in emerging markets. “To add further flexibility to our alpha generation capabilities, we can invest up to 10% into high yield bonds, which we select with the help of our dedicated high yield team members”, Reinhard says. The strategy has around EUR 150 million in assets under management, and investors can choose between three currency tranches – EUR, USD and CHF.