Credit Chronicle: Q3 2023
Ninety One’s Multi-Asset Credit team provides an update on how credit markets faired over Q3. The team also shares its latest scorecards for the global credit universe.
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Market summary
- It was a volatile quarter for financial markets. Except for some higher-rated collateralised loan obligations (CLOs) and agency mortgage-backed securities (MBS), most credit markets posted negative returns, but behind the headline figures there were notable bright spots.
- Fixed income markets came under pressure from both the rise in sovereign bond yields and a widening of credit spreads, as war in Iran sparked fears over the inflation and growth outlook. The European high-yield market was most affected, given the significant implications of the energy price shock for the region.
- In the investment-grade market, spreads widened somewhat in both the US and Europe, reflecting the rise in sovereign bond yields.
- In more specialist credit markets, bank capital (AT1s) came under pressure as sentiment soured in March and broader risk-off tone took hold.
- Floating rate markets fared better, given the protection they offer against rising interest rates. Higher-rated CLO tranches were the top performers, with their senior position in the capital structure providing an additional buffer. Elsewhere, spreads widened in the loan market, weighing on returns – moves reflected the continued backdrop of heavy loan supply and pressure on the software sector from the AI disruption theme (software accounts for a meaningful share of the loan market, as we noted here).
Where to focus and what to avoid
- We are defensively positioned and have been rotating away from European markets that are more heavily exposed to rising energy prices, taking profits on positions there.
- We have limited exposure to the market segments most at risk of AI disruption, favouring higher quality opportunities such as insurance sector issuers, where recent market moves mean we can find A-rated debt with spreads comparable to BB rated bonds.
- We are cautiously positioned in US investment-grade debt as issuance from hyperscalers (AI data centre providers) is tipping the supply/demand balance.
- In the high-yield market – where there is wide dispersion – we are capturing attractively valued opportunities, but continue to prefer specialist segments such as structured credit and bank capital over the most compressed parts of high yield (notably BB rated credit), where comparable yields are available at meaningfully better credit quality.
For the full breakdown of Q1 and to see our latest scorecards for the credit universe, read the PDF below.
