Citywire A-rated Iain Stealey and Nick Gartside, managers of the €884 million JP Morgan Global Bond Opportunities fund, are finding opportunities in four key areas as global bond markets brace themselves for the US Federal Reserve’s rate normalisation process.
‘Global growth is improving; better economic conditions coupled with continued global liquidity will be supportive of credit. However, after almost nine years, the transition to a different monetary regime creates uncertainty, reducing our conviction,’ the duo said in their latest commentary.
US and European high yield
The duo list both US and European high yield as attractive options in a market facing the prospect of increased volatility and reduced liquidity.
‘Corporate balance sheets look healthy. Defaults are low, companies are very practical in the way they’re managing their leverage, and credit spreads are pricing in a multiple of where default rates should be.
‘While we often see a hiccup in high yield during the dog days of summer, US high yield spreads are 150 basis points wider than where they were this time last year, providing an attractive level of cushion. European high yield continues to benefit from improving fundamentals, meaning that an already higher credit quality market is poised to deliver more rising stars – future investment grade companies that should deliver tighter spreads and higher prices.’
High yield is the Global Bond Opportunities fund's largest allocation, with 21.4% allocated to US high yield corporates and 17.3% to non-US.
Gems in loans, financials and securities
Stealey and Gartside are also seeing solid balance sheets in the leveraged loans sector, where spreads will continue to compensate for the expected modest credit losses: ‘For duration sensitive portfolios, leveraged loans offer attractive yields per unit of duration and risk.’
Additionally, the pair are finding gems in European financials, specifically hybrid bank debt and insurance, citing the attractive spreads in investment grade insurance relative to comparably rated banks.
Alternative Tier 1 securities (AT1s) and Contingent Convertibles (CoCos) will continue to offer great value as European banks come under pressure to increase capital and reduce riskier businesses with higher capital charges, they said. ‘In fact, we believe that some AT1s are potential upgrade candidates. The banks are borrowing down in the capital structure, just as the capital base is rising up.’
Gloomy outlook for emerging markets
On the downside, the pair are finding limited opportunities in export-driven emerging market countries:
‘Unfortunately, the emerging markets continue to experience below-trend growth, continuing a seven year trend.
‘Commodity prices remain a major headwind; the effects of a strong US dollar have yet to be fully priced in; and the specter of a Fed hike may increase the risks for EM crises. Differentiation is the key, and we’re focused on countries that have less borrowing needs; that are commodity importers, not exporters; and that are addressing structural reforms.’