Lu Yu, Credit Analyst at M&G
There is little doubt that underlying economic conditions are as favourable as they have been for many years. Synchronised global growth that has the potential to drive corporate top lines and profitability is good news for the high yield market. This should help support credit spreads and could even push default rates lower (more so in the US than Europe). However, our view is that credit spreads already largely discount this benign scenario and we are seeing little scope for material spread tightening from this point forth – a lot of good news is already in the price. Nevertheless, in relative terms, the high yield markets remain attractive for income seekers with the US market yielding 5.1% and the European market yielding 2.4% (in local currency terms), hence without a major change to the fundamental outlook, the asset class still has its attractions.
What we do see, however, is further underlying shifts within the market – the continued ripple effect of technological and social disruption to traditional industries. 2017 saw the “ Amazon.com effect” really start to bite. Could the “Netflix effect” gain momentum in 2018 ? Will we be talking about the “Tesla effect” by the end of the year?
Claudia Calich, manager of the M&G Emerging Markets Bond Fund
Emerging markets debt posted strong returns in 2017. One had to struggle to find an asset that produced negative returns and the only two that did, Venezuela and Turkish local bonds, reflected very different idiosyncratic factors.
Looking ahead into 2018, I expect to see more differentiation of returns given that we are starting from tighter valuations. The strong returns we saw in 2017 are unlikely to be repeated in 2018. However, should the tail-risks (US economic policy and the Fed, China, geopolitical risks and EM elections, etc.) remain on the backburner and volatility remain contained, the EM carry of 5.5-6.5% is not too shabby, especially considering the investment alternatives in other parts of global fixed income.
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