Substantial moves in credit markets so far this week have resulted in a dramatic 70-90% widening in global credit spreads over the year to date. While we are mindful of the fact that the virus will have serious implications for the global economy, markets are now pricing in a very weak environment – a scenario which may be too pessimistic in light of the policy steps being considered. Emergency monetary and fiscal measures being considered and – which in some cases are already being implemented – will be supportive for global economic growth and credit markets.
Furthermore, in an environment with zero or negative interest rates, fixed income investors will need to invest in credits to generate positive returns on. While it is always difficult to call the bottom in credit markets, we do think that at current valuations it is worth considering an increased allocation to credits.
Our global credit funds and mandates have maintained a quality bias with credit betas around neutral. Most funds and mandates hold a short position in the US high yield market via CDX North America High Yield as a hedge against market downturns.
Importantly, because of our liquid holdings, we are in a position to add risk to our portfolios without the need to sell corporate bonds and can fully benefit from opportunities as they arise: our portfolios hold sufficient cash and, in addition to our general cash holdings, we own large volumes of short-dated AAA-rated asset-backed securities as a buffer, which are highly liquid.
CDS markets – high yield – are pricing in a severe downturn. With the iTraxx Crossover at 500 basis points spread, the market is pricing in a default scenario with 26% defaults, and assuming a very low recovery rate of 20%. From a historical perspective, too, the spreads are wide.
The Bloomberg Barclays Global Aggregate Corporate Bond Index is trading at 140 basis points, as at Friday close. With cash markets around 15-20 basis points wider by mid-week this week, the index spread is likely to widen to around 160 basis points. This would be in line with levels seen in 2001 and 2016. During the 2008 and 2011 crises, which were more severe, spreads were wider.
The Bloomberg Barclays Global High Yield Index is trading at 610 basis points. Levels are historically at similar levels as investment grade.
The JP Morgan Corporate EMBI is trading at 346 basis points as at Friday’s close. The market was trading around 50 basis points wider by mid-week this week, implying an index level of around 400 basis points. This is still historically on the expensive side, as 2016 saw spread levels of 485 basis points.
Several parts of the market are now looking attractive after the repricing, as can be seen from the table, with current/median spread ratios now clearly above 1 for all segments of the global credit market.
The global spread of the coronavirus has forced policymakers as well as investors to reassess their outlook. To counter the fresh downside risks, central banks have started a new wave of easing.
After the emergency rate cut of 50 bps by the Fed last week, markets are pricing in a further 50 bps easing of the fed fund rate. In addition, other central banks have cut rates, too, including Australia, Canada, Brazil, Indonesia, Turkey and Russia. In the Eurozone the ECB may be compelled to do more than offering indirect liquidity support to businesses. We believe a rate cut and a temporary increase in the pace of net QE is becoming more likely by the day.
More fiscal stimulus is also to be expected, to provide relief to people and companies that are most affected by the negative economic impact from the Corona virus outbreak. The Japanese government announced that they will provide interest and collateral-free loans to small and mid-size companies hit by the virus outbreak. France, Japan and Korea are providing wage subsidies to firms and individuals for leave taken to stay home to care for children during school closing. Italy is offering tax extensions to cash-strapped businesses.
These monetary and fiscal measures will be supportive for global economic growth and credit markets.
The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.
Please read this information carefully.
This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.
2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:
3. Local legal and sales restrictions
The information contained in the Website is being provided for information purposes.
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. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.
4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.
5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.
6. Third party websites
Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage.
7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.
8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.
10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong.