singaporeen
Credit outlook: Markets already have the vaccine

Credit outlook: Markets already have the vaccine

29-09-2020 | Insight
The world is waiting for a vaccine that will enable us to return to our normal lives. The market already got its shot, though.
  • James Stuttard
    James
    Stuttard
    Head of Global Macro team and Portfolio Manager, Robeco
  • Sander  Bus
    Sander
    Bus
    Co-head Credit team
  • Victor  Verberk
    Victor
    Verberk
    CIO Fixed Income and Sustainability and Portfolio Manager of Robeco Global Credits

Speed read

  • Central banks have so far immunized markets against negative macro news
  • Markets are too complacent and are trading at rich valuations
  • Rally has run its course, but volatility will offer opportunities from time to time

We are still in the midst of the largest global health crisis seen in a century, and the world is waiting for a vaccine that will enable us to return to our normal lives. The market has already had its shot, though, in the form of unprecedented monetary and fiscal support for the private sector. The big question is if the immunity to negative news will last in the run-up to the US elections, and will survive the Brexit negotiations, geo-political tensions and the latest rise in Covid-19 infections.

Figure 1 | Market cycle: Mapping our view on market segments

Source: Robeco, September 2020

In light of the massive gap between markets and fundamentals, we approached this Credit Quarterly Outlook with the question: do fundamentals still matter?

Sander Bus, Co-head of the Robeco Credit team, says, “In the longer term, we have no doubt that fundamentals still matter for markets but, for the last several months, the central bank put has overwhelmed everything else. Quick and decisive action by governments and central banks helped to restore a large part of the initial losses, by removing the systemic risk in the market. The risk of a banking crisis or even a Eurozone sovereign crisis is now arguably lower than before Covid-19, due to the easing of banking regulation, the introduction of quasi Eurobonds, relaxed rules for state support and several other supportive actions by authorities”.

We recognize this dynamic and feel comfortable that at least senior bank and Eurozone sovereign spreads are under policy control and unlikely to move dramatically wider. The same holds for higher-quality corporate bonds that are eligible for ECB buying and that can benefit from fiscal support in the form of guaranteed lending, furlough schemes and other measures.

According to Bus, “one of the few segments of the market where fundamentals still matter today is the weaker end of the high yield market. Here you find many vulnerable companies that will not survive an extended period of weak demand”.

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

Limited inflationary impact

Victor Verberk, Co-head of the Robeco Credit team, sees limited inflationary consequences from the policy response. “We do not expect much inflationary impact from the massive increase in money supply engineered by fiscal authorities and central banks, at least in the next few years. The disinflationary forces stemming from the disruption to demand will simply be too strong. Secular forces such as aging and technological developments do not point to galloping inflation, either. Moreover, academic research suggests that the inflationary impact of deglobalization should not be overestimated”.

The odds of an inflationary uptick on a horizon beyond the coming years do seem more pronounced, though. Nevertheless, this would require the increase in money supply to be sustained and eventually associated with much stronger consumer and business spending, as ‘more money starts to chase fewer goods’.

Inflation will probably follow the rules of the ‘ketchup theory’, says Verberk: “At first, nothing comes out of the bottle, but as you keep on shaking and the ketchup starts to flow, you end up with more than you wanted.”

Fading recovery momentum

So, where are we now? After the initial shock, macro data in Q3 surprised to the upside compared to very downbeat expectations. This has helped risk markets. But the momentum of the recovery is clearly fading now and the positive surprises have ended. With winter approaching in the northern hemisphere, we are already seeing more infections across much of Europe and local lockdowns that will hurt the economic recovery.

For many corporates, the economic downturn means weaker balance sheets and negative cashflow. “Let’s not forget that Covid-19 arrived after the longest US economic expansion ever recorded by the NBER,” says Robeco Credit Strategist Jamie Stuttard. “We were already warning of an economic downturn in the Outlook a year ago, not knowing that Covid-19 would be the trigger.”

“Weaknesses such as stretched balance sheets, debt-funded M&A and poor documentation were already prevalent in corporate credit. Massive government intervention in the private sector and liquidity injections helped to extend the cycle but it is likely (and healthy!) that we go through a proper bear market. A bear market is the best medicine to clean up the house; it gets rid of zombie firms, repairs balance sheets, and strengthens documentation. Only when that process is finalized are the markets ready for a brand new multi-year credit bull market,” says Stuttard.

Stretched valuations

“For the market as a whole we judge valuations as being stretched,” says Verberk. “Spread levels are at or below the long-term average for all segments of the market. The tight spreads can be explained by the strong technicals but do not compensate for the current fundamental environment.”

He adds that the market looks even more expensive if adjusted for quality. “The weight of BBB in the US investment grade market has steadily gone up from 35% in 2008 to over 50% today, within 0.5% of its all-time record.”

For high yield, it is easier to see spreads going wider from here, explains Bus, since this market only benefits indirectly from the central bank put. “The Fed limits individual high yield bond buying to companies that were investment grade before late March 2020, a sum total of just eight tickers.”

The rally may have run its course

“We now hold the view that the rally has run its course,” says Bus. “It is difficult to see further material spread tightening from here. We lower our beta for investment grade to 1. For high yield, where we were already below 1, we keep it there.”

We are convinced that there will be opportunities to add or reduce risk in the coming months, not only from a top-down perspective but also in individual issuers or sectors. There is still a lot of volatility in Covid-sensitive sectors, which from time to time offer good value.

Important information

This information is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation.
The contents of this document have not been reviewed by the Monetary Authority of Singapore (“MAS”). Robeco Singapore Private Limited holds a capital markets services license for fund management issued by the MAS and is subject to certain clientele restrictions under such license.
An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.

Logo

Important Information

Warning/Important note: This website contains information which is only available to qualified investors as defined below. If you are not a qualified investor, please click “I Disagree” to leave the website.

By clicking on "I agree", I declare that: 

  • I am a qualified investor as defined under 1
  • I have read and understood the Terms and Conditions and Disclaimers as described under 2

1 - This website may only be accessed directly or indirectly by the following persons in Singapore:

1) “institutional investor” under section 304 of the Securities and Futures Act (Cap.289)(“SFA”), which means:
(i) the Government; (ii) a statutory board as may be prescribed by regulations made under section 341 of the SFA; (iii) an entity that is wholly and beneficially owned, whether directly or indirectly, by a central government of a country and whose principal activity is (A) to manage its own funds; (B) to manage the funds of the central government of that country (which may include the reserves of that central government and any pension or provident fund of that country); or (C) to manage the funds (which may include the reserves of that central government and any pension or provident fund of that country) of another entity that is wholly and beneficially owned, whether directly or indirectly, by the central government of that country; (iv) any entity (A) that is wholly and beneficially owned, whether directly or indirectly, by the central government of a country; and (B) whose funds are managed by an entity mentioned in sub-paragraph (iii); (v) a central bank in a jurisdiction other than Singapore; (vi) a central government in a country other than Singapore; (vii) an agency (of a central government in a country other than Singapore) that is incorporated or established in a country other than Singapore; (viii) a multilateral agency, international organisation or supranational agency as may be prescribed by regulations made under section 341 of the SFA; (ix) a bank that is licensed under the Banking Act (Cap.19); (x) a merchant bank that is approved as a financial institution under section 28 of the Monetary Authority of Singapore Act (Cap.186); (xi) a finance company that is licensed under the Finance Companies Act (Cap.108); (xii) a company or co-operative society that is licensed under the Insurance Act (Cap.142) to carry on insurance business in Singapore; (xiii) a company licensed under the Trust Companies Act (Cap.336); (xiv) a holder of a capital markets services licence; (xv) an approved exchange; (xvi) a recognised market operator; (xvii) an approved clearing house; (xviii) a recognised clearing house; (xix) a licensed trade repository; (xx) a licensed foreign trade repository; (xxi) an approved holding company; (xxii) a Depository as defined in section 81SF of the SFA; (xxiii) an entity or a trust formed or incorporated in a jurisdiction other than Singapore, which is regulated for the carrying on of any financial activity in that jurisdiction by a public authority of that jurisdiction that exercises a function that corresponds to a regulatory function of the Authority under this Act, the Banking Act (Cap.19), the Finance Companies Act (Cap.108), the Monetary Authority of Singapore Act (Cap.186), the Insurance Act (Cap.142), the Trust Companies Act (Cap.336) or such other Act as may be prescribed by regulations made under section 341 of the SFA; (xxiv) a pension fund, or collective investment scheme, whether constituted in Singapore or elsewhere; (xxv) a person (other than an individual) who carries on the business of dealing in bonds with accredited investors or expert investors; (xxvi) the trustee of such trust as the Authority may prescribe, when acting in that capacity; or; (xxvii) such other person as the Authority may prescribe.

2) “relevant person” under section 305(1) of the SFA, which means:
(i) An accredited investor; (ii) a corporation the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; (iii) a trustee of a trust the sole purpose of which is to hold investments and each beneficiary of which is an individual who is an accredited investor; (iv) an officer or equivalent person of the person making the offer (such person being an entity) or a spouse, parent, brother, sister, son or daughter of that officer or equivalent person; or (v) a spouse, parent, brother, sister, son or daughter of the person making the offer (such person being an individual).

3) any person who acquires the units [in a collective investment scheme] as principal if the offer is on terms that the units may only be required at a consideration of not less than $200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of units in a collective investment scheme, securities, securities-based derivatives contracts or other assets, and if the following condition is satisfied: (i) the offer is not accompanied by an advertisement making an offer or calling attention to the offer or intended offer; (ii) no selling or promotional expenses are paid or incurred in connection with the offer other than those incurred for administrative or professional services, or by way of commission or fee for services rendered by any of the persons specified in section 302B(1)(d)(i) to (vi) of the SFA; and (iii) no prospectus in respect of the offer has been registered by the Authority or, where a prospectus has been registered (A) the prospectus has eAccxpired pursuant to section 299 of the SFA; or (B) the person making the offer has before making the offer 1. informed the Authority by notice in writing of its intent to make the offer in reliance on the exemption under this subsection; and 2. taken reasonable steps to inform in writing the person to whom the offer is made that the offer is made in reliance on the exemption under this subsection.

4) Or otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

If you are not any of the types of persons described above, you are not authorized to enter this website and you should leave this website immediately.

2 Terms and Conditions
You acknowledge that you have read these Terms and Conditions (“Terms”) prior to accessing the website located at www.robeco.com/sg (“Website”) and you agree to be bound by the Terms.  If you do not agree to all of the Terms, you are not an authorised user and you should not use the Website. The Website is owned by Robeco Singapore Private Limited (company registration number: UEN. 201541306Z), which is licensed by the Monetary Authority of Singapore (“MAS”) pursuant to the Securities and Futures Act (Cap.289) (“SFA”) of Singapore, and is managed by Robeco Singapore Private Limited and/or its affiliates (collectively, as “Robeco”). The Website is intended for and should be accessed by institutional investors or accredited investors (as defined under Section 4A of the SFA) of Singapore.  The Website is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject the Robeco to any registration or licensing requirement within such jurisdiction.  It is your responsibility to observe all applicable laws, rules and regulations of any relevant jurisdiction. The content contained in the Website is owned by Robeco and/or its information providers and is protected by applicable copyrights, trademarks, service marks, and/or other intellectual property rights.  You may not copy, distribute, modify, post, frame or link the Website, including any text, graphics, video, audio, software code, user interface, design or logos.  You may not distribute, modify, transmit, reuse, repost, or use the content of the Website for public or commercial use, including all text, images, audio and/or video.  Robeco may terminate your access to the Website for any reason, without prior notice. Neither Robeco, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from the access of the Website.  You agree to indemnity and hold Robeco, its associates, directors, officers or employees harmless against any and all claims, losses, liability, costs and expenses arising from your use of the Website due to violation of the Terms. Robeco reserves the right to change, modify, add or remove any parts of the Terms at any time and for any reason.  The Terms shall deemed to be effective immediately upon posting. The Terms shall be governed by, and shall be construed in accordance with, the law of Singapore.

Disclaimers
The Website has not been reviewed by the MAS. Accordingly, the Website may not be accessed directly or indirectly to persons in Singapore other than (i) to an institutional investor under Section 304 of the SFA, (ii) to a relevant person pursuant to Section 305(1), or any person pursuant to Section 305(2), and in accordance with the conditions specified in Section 305, of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. 

Nothing in the Website constitutes tax, accounting, regulatory, legal or investment advice.  The Website is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation or for the purpose of soliciting any action in relation to Robeco’s businesses, or solicitation by anyone in any jurisdiction in which such an offer or solicitation is not authorised or to any person to whom it is unlawful to make such an offer and solicitation. Any reproduction or distribution of information from the Website, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited.  By accessing to the Website, you agree to the foregoing.  

The funds referred to in the Website are for information only.  It is not a recommendation or investment advice, nor does it mean the funds is suitable for all investors.  The contents of the website is not reviewed by the MAS.  Any decision to participate in the funds should be made only after reviewing the sections regarding investment considerations, conflicts of interest, risk factors and the relevant Singapore selling restrictions.  You should consult your professional adviser if you are in doubt about the stringent restrictions applicable to the use of the Website, regulatory status of the funds, applicable regulatory protection, associated risks and suitability of the funds to your objectives.

Any decisions made based on the information contained in the Website are the sole responsibility of yours.  Any investments made or to be made shall be with your independent analyses based on your financial situation and objectives.  The investments and strategies contained in the Website may not be suitable for all investors and are not guaranteed by Robeco.  

Investment involves risks and may lose value.  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.  The Website may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies and such projection or forecast is not indicative of the future.  The information contained in the Website, including any data, projections and underlying assumptions are based upon certain assumptions, management forecasts and analysis of information available on an “as is” basis and without warranties of any kind, whether express or implied, and reflects prevailing conditions and Robeco’s views as of the date published or indicated, and maybe superseded by subsequent events or for other reasons.  The information contained in the Website are accordingly subject to change at any time without notice and Robeco are under no obligation to notify you of any of these changes.  Robeco expressly disclaims all liability for errors and omissions in the information presented in the Website and for the use or interpretation by others of information contained in the Website.

Robeco Singapore Private Limited holds a capital markets services licence for fund management issued by the MAS and is subject to certain clientele restrictions under such licence.  An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.

I Disagree