Markets are on the mend and multiple indicators suggest that asset allocators are regaining confidence. It seems they recognise that the pace of the recovery could mirror the speed of the drawdown in March, when the combination of the oil-price war and the coronavirus shock resulted in the weakest first six months of the year in two decades (see figure 1).
Figure 1. Credit markets: the worst start in 20 years
Source: ICE Bond Indices, Federated Hermes, as at June 2020.
Markets have since flatlined in response to the dichotomy between better-than-expected economic data (particularly in the US) and the risk of a second wave of coronavirus infections.
A number of factors will determine which side prevails. The start of Q2 earnings season – and the release of full-year 2020 guidance – will give us a better picture of how firms have been affected by the crisis and the ways in which they could recover as producers and consumers adjust to the new normal. And second, the policy direction of US presidential candidates should start to take shape and will provide an insight into how the US-China trade dispute could evolve.
Regardless of how the next month unfolds, it is clear that credit is well positioned for the rest of this year. Yet it is unlikely that any recovery will be a homogeneous one, making it all the more important to take a flexible, top-down approach to seeking out opportunities across the credit spectrum.