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The road less travelled: 360°, Q4 2020

What is our current view of fixed-income markets? And where do we see the best relative value? In our latest edition of 360°, Andrew ‘Jacko’ Jackson, Head of Fixed Income, and his team of specialist investors considers the areas that have the potential to deliver superior risk-adjusted returns.

Avoiding the herd

At times, it feels that few share my view of markets. It is during these periods that I feel it is most important to call out herd behaviour – something that tends to increase during episodes of mass fear.

This phenomenon is clear in today’s atmosphere of unprecedented uncertainty. The relationship between growth and value is undoubtedly stretched and some valuations appear to be in – or are heading towards – bubble territory. Meanwhile, central banks are manipulating markets with injections of liquidity, which makes determining the immediate direction of travel very difficult.

There is no doubt that the technical environment is an excellent one for credit. There is little-to-no yield to be found in developed-market sovereign debt, equity income is challenged, and credit spreads remain wider than their historical averages. We have a less positive view on fundamentals, which in some respects are weaker than they have been for a decade.

Going forward, we will take an active, conservative approach to credit investing that uses detailed, bottom-up analysis – something we believe will help us seek out the opportunities that are so often overlooked by those that follow the herd.

An independent path: issues in focus this quarter

In this issue of 360°, we also take a closer look at three areas:

  • Credit fundamentals: has central-bank stimulus succeeded in calming markets?
  • Structured credit: the ability of borrowers to repay and service their debt
  • Sustainable fixed income: decarbonising activity at the firm level 

See below for a flavour of these sections or read the full report for a more comprehensive picture.

A decline in ratings downgrades suggests that credit fundamentals have held up better than expected. Yet profits remain under pressure, while leverage has risen. Meanwhile, default rates are elevated – particularly in the energy sector, which accounts for 29% of US high-yield defaults this year.

The speed and coordination of central-bank activity mean that structured-credit spreads have tightened significantly from their widest points. While 17% of UK mortgage holders took payment holidays, the number has fallen from its peak.

While green bonds are necessary, they are not sufficient to solve the climate crisis. Decarbonisation will not happen unless companies find ways to create economic value and simultaneously align their activities with the goals of the Paris Agreement.

Fixed Income Quarterly Report

Q3 2020
 

Archive: previous editions of 360°

As fixed-income markets have moved through the economic cycle, our thinking has also developed – take a look at some of our previous reports to see how the investment landscape has changed over the past year.