US high yield (ex-energy), US investment grade corporates and European high yield will become attractive investment opportunities in 2017, Iain Stealey, the head of global aggregate strategies, managing director at JP Morgan Asset Management said in a press briefing on Wednesday held in Singapore.
Stealey said he will focus on credit markets, which are in a beneficial position in the current economic backdrop.
‘We saw a huge amount of US high yield defaults over the course of the year-end in the energy sector. If you look at the basis of the 12 months, default rates in ex-energy companies were less,’ he said.
‘The spreads and the improving economic backdrop in the US, with the full rates to come back, should be the reasons to buy high yield.
'There is room for the spreads to tighten during the current economic backdrop, and to leave some of the pressure for higher rates.’
Secondly, US investment grade corporates also present very supportive technicals and attractive valuations, according to the global aggregate strategies head.
‘In the investment grade space in the US, this actually creates opportunities for international investors to buy US corporate bonds.
‘A huge demand from last year has seen investments move out from labouring government bonds from Europe and Japan. We have seen that amount of money coming into US investment grade.'
He said foreign investments into US corporate bonds have significantly picked up over the past few years and he expects that to continue steadily this year.
Thirdly, European high yield also offers attractive default-adjusted spreads.
‘The final area that we like is the European high yield market. Europe as a whole is actually healthier, we have seen it is really booming, while the economic condition and trade growth there should be supportive.’
‘ECB has invested 60 billion euro every month since March last year into buying government bonds and investment grade corporate bonds. However, that money finds its way into high yield markets when we look back.’
Stealey also listed emerging markets as part of his four conviction ideas.
Regarding emerging markets, he said EM price selections are comparatively constructive.
‘The picture of fundamentals has picked up, macroeconomic condition has been good; rates start upturn; while some of the problems we have around EMs through taper tantrum back in 2016 has also been removed,’ Stealey said.
‘From the valuation standpoint, we have seen all the yields from the local government bonds in the EMs space were about 7% in 2015, while they were 5% in 2013.’
Other conviction ideas Stealey mentioned during the press briefing included global opportunities, macro trades and spread sectors, accoridng to the bond expert.