Disclaimer

The information contained in the website is solely intended for professional investors. Some funds shown on this website fall outside the scope of the Dutch Act on the Financial Supervision (Wet op het financieel toezicht) and therefore do not (need to) have a license from the Authority for the Financial Markets (AFM).

The funds shown on this website may not be available in your country. Please select your country website (top right corner) to view the products that are available in your country.

Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, annual and semi-annual reports, which can be all be obtained free of charge at this website and at the Robeco offices in each country where Robeco has a presence.

By clicking Proceed I confirm that I am a professional investor and that I have read, understood and accept the terms of use for this website.

Decline
Boom & Bust

Boom & Bust

06-04-2017 | Quarterly outlook
In its Credit Quarterly Outlook, Robeco’s Credit team expects inflation to pick up. Monetary easing will end and wage inflation may eat into profit margins. This is good news for active managers. In the coming period, the team of Sander Bus and Victor Verberk aims to prove its added value by avoiding losers and identifying segments of the market that can still perform well in this environment.
  • Sander  Bus
    Sander
    Bus
    CFA, Managing Director, Co-head Credit team, Portfolio Manager and Head High Yield
  • Victor  Verberk
    Victor
    Verberk
    Deputy Head of Investments

Speed read

  • Inflation likely to rise; Central Banks will respond
  • Increasingly populist politics lead to de-globalization
  • The US credit cycle is mature; European credit is more mid-cycle

The global economy is strong. Output gaps are closing with the economy growing above its potential. This means that further growth could result in accelerating inflation and central banks will have to respond. The end of monetary easing has arrived with the Fed in a rate hike cycle, the European Central Bank (ECB) being expected to start tapering Quantitative Easing (QE) and the People’s Bank of China (PBOC) tightening monetary conditions as well.

Growth in itself is good for credit, but the credit cycle is mature, especially in the US. Credit spreads offer only limited room for further tightening, especially when we consider that corporate credit quality keeps deteriorating, particularly in the US and China. Wage growth and higher rates can put pressure on profits.

Volatility has been subdued for a pretty long time due to the predictability of central banks. This has also reduced the dispersion in markets, which made it more difficult for active management to make a difference. With monetary conditions now tightening we should expect more dispersion and less predictable correlations. That is good news for active managers like ourselves.

Stay informed on Credit investing with monthly mail updates
Stay informed on Credit investing with monthly mail updates
Subscribe

Valuations are expensive

On balance, spreads have tightened in all credit categories over the last three months. Valuations have therefore become more expensive. In the past, we have seen that credit markets can trade at very tight levels for an extended period of time and then suddenly widen aggressively. It is always very difficult to exactly time that moment, but it is fair to say that many parts of the market are more or less priced for perfection and there is limited room for error. That means that we do no longer pursue a strategy of buying on dips. That would be too risky as the end of the credit cycle is nearing.

We remain conservatively positioned with a preference for Europe, and within Europe a preference for financials. Even after the recent outperformance, we still believe that insurance companies trade too cheap and expect a bit more recovery from financials versus corporates in general. We are most cautious on emerging debt and US high yield. Within high yield, we stick to our underweight in the lowest credit quality.

Monetary policy turns into a negative technical

Monetary policy has turned into a negative technical for credit markets. Although the aggregate size of central bank balance sheets is still rising due to the buying programs of the ECB and the Bank of Japan (BOJ), momentum has certainly shifted.

Fiscal stimulus is not what is needed at this point in the cycle, but it is exactly what Donald Trump is planning to do. The Fed will respond and rates have much more room to rise. Economic growth is positive for credit, but the strong technical will disappear when the ECB reduces its QE program.

What we see as a risk are investors that have developed a high appetite for risk due to the perceived low volatility. Risk models that use implied volatility or current spreads as an input are typically pro-cyclical in nature. When markets turn, risks go up and investors might be forced out of their risky positions. We have seen huge flows into credit mutual funds over recent years, often from investors that can be classified as tourists. Low rates have pushed these investors out of money markets into higher yielding, higher risk categories.

Consistently at the forefront of credit management
Consistently at the forefront of credit management
Credit investing

Cautious positions

We remain cautiously positioned with betas close to or just below 1 and focus on issuer selection. In the past years, we have always advocated to add risk on weakness as we knew that the strong technical on the back of central bank buying was supporting the markets. That has changed now and as a result we have become less courageous.

In emerging debt, we nurture our short beta position and quality bias. we are approaching the moment at which less monetary stimulus will also affect emerging credit markets.

We prefer financials and more domestic consumer-related sectors. We are hesitant to invest in companies with a high exposure to global trade or the capital spending cycle.