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Notes on a crisis: from the rear-view mirror to the road ahead (part I)

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 first 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 entered 2020, markets were at record highs and there were concerns about whether this irrational exuberance could last. Yet as Jacko points out, ‘nobody could have predicted what happened’.

Kuznetsov talks about the immediate aftermath of the March sell-off, saying that ‘you basically had to re-underwrite your portfolio in a very short period of time’. This meant focusing on scenario analysis and liquidity and considering the ways in which consumer behaviour and business models might change in a post-Covid world. 

Jacko agrees, saying that ‘traditional models that are based on EBITDA and cashflow kind of had to be thrown out of the window’. Instead, there was a need to ‘switch from a traditional model approach in our credit analysis to a very, very different approach’ that centred on which issuers might be able to weather the storm.

How did the Credit team tackle this period of turbulence, and what has changed in markets over the past year? To find out, tune into Delta.

Part two is out now.

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In each episode of Delta, Jacko and his guests answer a front-of-mind question from listeners in a regular feature, ‘All options on the table’. Enter yours below.

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