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Notes on a crisis

From the rear-view mirror to the road ahead (part II)

2 October 2020 |
Active ESG
Rallying credit markets at the turn of the year were followed by the swift, pandemic-induced drawdown in March, ushering in a period of heightened volatility and some of the worst liquidity conditions since the financial crisis. As we emerge from a tumultuous six months, we consider what has changed in markets and what might lie ahead for fixed-income investors.

Part retrospective, part forward-looking, this episode of Delta takes stock of the past 12 months and looks at what could happen going forward. In the second instalment, Andrew ‘Jacko’ Jackson, Head of Fixed Income, is joined by Andrey Kuznetsov, a Senior Credit Portfolio Manager at the international business of Federated Hermes.

As we emerge from the crisis, Jacko and Kuznetsov consider some of the scenarios that could materialise over the next six to 12 months as the world grapples with Brexit, the US election and, of course, Covid-19.

Looking to Covid and the associated economic slowdown, Kuznetsov says ‘I think it’s safe to say we will not be at the same level of cashflow generation across the market for a while’. Yet changes to corporate behaviour are positive for credit investors, as downgrades have encouraged firms to cancel equity distributions, reduce capital expenditure and cut costs. Kuznetsov argues that ‘this is very good for credit holders – we want companies to really care about their credit profile’.

Jacko points out that the considerable uncertainty we face means that ‘there is a degree to which we need to continue to be cautious’. Yet there are opportunities for investors that are able to pay proper attention to fundamental factors. As Kuznetsov says, ‘there are fundamental and structural changes in many industries and many historical relationships are not likely to revert to mean. As a result, you need to put a bigger weight on the actual makeup, or what you are looking at from a fundamental perspective’. 

What opportunities does the Credit team think might emerge over the next year, and how can fixed-income investors navigate a world of higher volatility and reduced liquidity? To find out, tune into Delta.

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