By CHRISTOPHER A SHELDON, KEVIN MCMAHON, KRISTOPHER NOVELL Dec 07, 2022
As we engage with our investors during these uncertain times, we are often asked, “Where are you seeing the most attractive relative value opportunities?” The short answer is that we believe there is a lot of “best” relative value in the marketplace today: Different kinds of credit opportunities can suit the different aims of different investors. However, we do have a few key takeaways to help frame what may be optimal for your portfolio:
- We believe credit is going to be more attractive than equities over the medium term, with yield a valued differentiator at a time of slowing growth and higher inflation. In the short term, investors can get an extension of yield at current levels through call protection, which can be valuable.
- Deciding where to allocate within Credit depends on individual requirements for volatility, duration risk, liquidity, return levels, and the trade-offs between returns and seniority within the capital structure.
- Short-term volatility isn’t a good reason to delay investing in Credit, as the drivers are typically transient and liquidity dries up quickly when the market bottoms. When the Credit market rallies, it tends to happen rapidly, and market levels usually bottom out before fundamentals.
- There are risks to our view but we believe these are largely mitigated. The main risk is a severe slowdown in terms of fundamental performance in corporatecredits. We note that revenue and EBITDA levels are slowing, but remain robust. While rising interest rates are unlikely to cause repayment or refinancing issues for the average issuer of a sub-investment grade credit, bottom-up analysis is vital to identifying the outliers that will come under pressure.