Looking for Goldilocks: not too hot, nor too cold
The coronavirus pandemic has placed credit markets in a precarious position. Currently, there is a tug-of-war between deteriorating market fundamentals and the incessant injections of liquidity and support from financial banks and governments.
Market fundamentals are now in a far worse position than in February. The market bounce was no natural rise from the bottom, but a massive upwards boost that was triggered by the largest, fastest and most coordinated central-bank intervention in the history of modern finance.
Yet coupled with these risks, there are metrics which indicate that markets are not in a uniformly poorer state – nor that the situation is so bad that fixed-income investors can’t find pockets of good value. In fact, the crisis has highlighted both the relative resilience and value of fixed income as defensive asset class.
With both perspectives in mind, we find ourselves in the middle ground. Overall, we have a positive view on credit – but with caveats. For years, we heard about the Goldilocks economy in which credit thrived when growth was neither too hot nor too cold. Now, credit markets should perform in a scenario that is not too safe, nor too risky.
Overall, we expect ongoing volatility, corporate casualties, for sectors to fight for survival and for an appealing trade-off of risks and returns. Importantly, we believe that both public and private credit markets offer the chance to seek relative value and see a wealth of opportunities to seek alpha in this new coronavirus era.