A specialist fund manager has advised investors that credit markets are now offering the right risk and return profile with regard to the current economic environment of rising interest rates and inflation.
“With corporate [credit markets we] need to look at the dark clouds that are coming, but [we must determine] how much of that is already priced in and what we can see is that a lot of the bad news has already been priced in,” Robeco client portfolio manager David Hawa said.
“[So] despite saying that we do see probability of a recession, we believe that the market has really taken that into consideration.”
Hawa pointed out the evidence this valuation shift has already occurred can be gleaned from current spreads in credit markets.
“If you look at investment-grade (IG) corporates, we started at spreads, that’s the premium that you get over government bonds, of 95 basis points at the beginning of the year,” he noted.
“We are now at 218 basis points – an indication that you are being rewarded now for the risk that you are taking on.”
He did warn though that investors needed to recognise the difference in credit markets around the world as the risk premium offered would not be of a standard amount.
“You need to differentiate with those markets that have actually underperformed relative to other markets. So if you look at European IG [corporates] at 200 basis points over [government bonds] and you compare that to US IG [corporates, which is] at 155 basis points,” he said.
“So you do need to take that into consideration.”
With regard to high-yield credit instruments, he cautioned some risk is yet to be priced in.
“Our view is that we are still not there yet with high-yield [bonds]. We still see higher volatility coming through, [meaning] we’ve moved from an underweight to a neutral [portfolio position], but not an overweight position,” he revealed.''