Global bonds will benefit from the recovery and reopening of economies, with the leisure and entertainment sectors offering value, but coronavirus variants may still spook investors, according to a global fund manager.
Eaton Vance Management high-yield portfolio manager Kelley Baccei Gerrity and institutional portfolio manager Will Reardon said the outlook for the global high-yield market remains positive, but choosing the right sectors was still important.
“With average valuations now tight and market volatility likely to increase in the second half of 2021, we believe a very selective investment approach is required in order to capture remaining spread-tightening opportunities and limit downside risk,” Baccei Gerrity and Reardon explained.
“The global developed economy is on a resurgent trajectory, corporate fundamentals have improved dramatically and central bank policy remains accommodative.
“That said, there are also critical factors that could weigh on the market: tight average valuations, the changing impulse of liquidity, the threat of persistent inflation and COVID variant uncertainty.”
Baccei Gerrity and Reardon revealed despite these factors, they saw investment opportunities in parts of the entertainment and energy sectors.
“We still see some value among select radio broadcasters, cruise lines and other players in the leisure industry, homebuilders, and entertainment and film companies,” they noted.
“Caution is warranted, however. If concern over the delta variant lessens, some of the bonds in these names will experience material spread compression, but if concern over delta, or a newer variant, grows, this cohort will be in investors’ crosshairs.
“Near term, we see relative value opportunities in certain energy producers with quality assets.
“We have little faith the Organization of the Petroleum Exporting Countries will maintain supply discipline should the price of oil climb or even stabilise near current levels.
“However, we believe the oil supply response in the United States is likely to be muted in view of domestic public policy, shareholder activism, calls for capital conservatism and the growing ‘fossil-free’ trend among large public pension plans.
“Putting all that together, we believe it prudent at this juncture to reduce risk on the margin, edge up the capital structure, lower duration exposure and adopt a very selective, watchful approach to the market.”
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