7 December 2023. In one chart and a 1-minute read, Ninety One’s Multi-Asset Credit team explains how valuations across credit markets have become highly diverse, making for ideal conditions for bottom-up investors as we enter 2024.
The chart
Credit-spread tightening seen in 2023 has been uneven – valuations have shifted from being uniformly cheap to highly diverse.
Source: Bloomberg, Ninety One, 30 November 2023. Investment grade and high yield indices are based on ICE BAML corporate indices, while structured credit is based on Citi CLO data.
The context
Considering the credit market through the lens of credit spreads – the compensation investors earn over and above government bond yields – a major shift has taken place this year. In 2022, a widespread sell-off hit all areas of the credit market indiscriminately, causing a widening of spreads across the board and making valuations uniformly cheap as we entered 2023. Things have changed significantly since then.
Jeff Boswell, Head of Alternative Credit, Ninety One: “A combination of particularly supportive technicals (supply/demand dynamics) in certain credit markets, and a renewed focus on company fundamentals (rather than macro drivers) means over the course of this year we’ve seen the level of dispersion surge, both across asset classes and within them.”
Credit spreads have tightened significantly in some – but not all – areas of the market; today they range from being almost the widest in 10 years to almost the tightest in the same period, as the chart shows. Markets such as US high-yield debt have become richly valued, while areas such as bank capital (CoCos) and structured credit remain overlooked and undervalued.
The conclusion
The high-dispersion, high-differentiation conditions seen in credit markets today are giving rise to areas of opportunity across a variety of credit-market segments, and Boswell notes that this dispersion theme is also evident within asset classes:
“Even within more richly valued segments such as US investment-grade debt, we find pockets of value. For instance, senior US bank debt still looks attractive relative to the broader investment-grade debt market, and pockets of value can also be found within the loans market. The upshot is that these are ideal conditions for bottom-up investors as we enter 2024.”