24-11-2021 · 訪談

Talk ’22: ‘A season for active credit managers to thrive’

With super stimulus gradually coming to an end, markets will once again be able to distinguish between good and bad credit, says Sander Bus, Co-Head of Credits. In our 2022 outlook interview series, Robeco’s experts answer five key questions about their investing arenas.

What’s the big thing to watch in 2022?

“Two things will be particularly important in 2022, and should be tracked closely: China and inflation. It’s clear that China is slowing down, driven by its property sector. Electricity rationing has a role in this, too, as some factories are being shut down because of the government’s decarbonization efforts. It's crucial to understand what that slowdown will do to the rest of the world, because – although the West is in a very strong economic situation – the Chinese economy is large and any changes in its growth momentum have implications for the global economy. Consider that a large portion of the world’s raw materials and inputs go to China and that, when China’s economic growth pace picks up, it accelerates global growth. Now, as its growth rate slows, we would therefore expect this to influence global growth. So, that’s something to watch closely.”

“And the second thing, of course, is inflation. We will probably get clarity next year on whether inflation is transitory or whether it has indeed become a more permanent phenomenon. Until then, it will remain the subject of ongoing debate. To us, the inflation path is important for two reasons. Firstly, it’s important from a macroeconomic perspective, and central banks will act on it. Secondly, for us as credit investors it’s important to understand what the implications are for individual issuers. We’ve already seen some companies in the auto parts industry, for instance, struggling because of higher input costs or chip shortages, and now also scarcity in the supply of magnesium and rubber. Many sectors are experiencing input price increases; not all companies will be able to pass these on and will therefore be in for a margin squeeze. It is important for credit investors to identify how companies are positioned in this regard, because idiosyncratic risk will increase in this environment.”

“The big change in the coming year is that we will no longer have powerful policy support. There was such enormous support from governments and central banks in 2020 and 2021 that it almost didn't matter where you invested. Companies did well, they were rescued, lifelines were thrown to them. When central banks pull out of quant easing, which is going to happen, that lifeline will disappear. For an active manager like us, the fact that financial repression will finally end is good news. For financial markets as a whole this might imply a more difficult year, that could include higher volatility and elevated risk premiums. Although total returns may be lower as a result, managers who are able to select the right assets will succeed in outperforming the market.”

What’s the biggest change you have seen since Covid-19 emerged that could have a lasting impact into and beyond 2022?

“I think one of the things that happened during Covid-19 was that governments really took back control of the economy. We came from what was very much a neoliberal environment, and a holy belief in the market. But the market typically fails in a big crisis, so governments really had to step in, to ensure companies survived, and to sustain employment. And I think governments now have seen how powerful and important they can be. I wouldn’t be surprised if we were to move towards a new regime where governments will more often take control and intervene in markets. Because there is another crisis looming: the climate crisis. It is rapidly approaching and in this case, too, I expect that governments will do much more to take control. So that’s a new prospect for investors, that we may move a little further away from markets and from neoliberalism.”

“Another lasting impact is one which is more bottom up in nature. We’ve seen the vulnerability of global supply chains and just-in-time management, and we’re experiencing shortages in many sectors. It has become clear how few suppliers there are of critical inputs and how much the world depends on China for numerous products. My view is that there will be a push towards more insourcing of certain strategically important materials. In other words, global supply chains will have to change. The key is that, in this shift, there will be winners and losers. And it’s up to us to identify those in our credit selection process.”

Where are you most out of consensus with your approach?

“Our approach is always to do our best to avoid behavioral biases. In fact, we aim to exploit such biases. Importantly, the way we exploit behavioral biases depends on the credit asset class in which we’re investing. For instance, in investment grade, the average investor focuses on avoiding risk. This risk aversion means that investment grade investors typically sell bonds that they believe have a risk of being downgraded to high yield. There’s often overshooting in this process, in the sense that these bonds tend to become oversold. In investment grade, our contrarian approach is to have a value strategy and to look for bonds that could mean revert.”

“On the high yield side, you see exactly the opposite, where many high yield managers are risk-loving and on the lookout for higher-yielding bonds – and therefore tend to overpay for risk. When they believe a bond has become too tight – that is, its yield has fallen too far – these managers are inclined to sell and move to higher-yielding bonds. This is where it pays to have a conservative strategy, to benefit from this bias, because a bond that has a rating in the high end of the BB range could move to BBB next year, and may therefore still have very good upside on a risk-return basis.”

“So that explains why, on the investment grade side, we have more of a value strategy and on the high yield side, we follow a more conservative strategy. In both cases the approach exploits the same behavioral bias.”

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What will be the biggest game changer in 2022?

“The Sustainable Finance Disclosure Regulation (SFDR) is a game changer and will have an impact on all fund managers. It forms part of the push towards sustainability in Europe and globally. In complying with this regulation, it means that investors will be looking not only at performance but also at the sustainability impact of their portfolios. In light of the commitments to the Paris Agreement, decarbonization is a key element of this, together with the requirement to report on our progress. These developments will change markets as well as change the way we communicate with clients about performance.”

“And, as climate regulation becomes stricter, we can expect an increase in carbon taxes, import duties on carbon and a complete shift in the way companies develop and produce products.

All of this implies a fundamental shift for asset management, and for the companies in which we invest. To do well in this environment, and to deliver the right outcomes for clients, the investment industry needs to nurture suitable skills and methodologies – and ensure we have in place what we like to call the ‘portfolio manager 2.0’.”

What is your personal inspiration to help you navigate through the coming year?

“As I look to the new year, one of the biggest inspirations for me is knowing that we are reaching the end of financial repression. As an active manager, I’m extremely relieved that we’ve finally reached this stage. It has been tough to navigate the past 18 months; it almost seemed as though it didn’t matter what assets you bought, as governments were making sure that no one defaulted. And that’s not an ideal environment for an active manager. I think that this is about to change, and markets will again be able to distinguish between good and bad credit. This means that our research will finally pay off again in 2022 – which makes my job of finding the best assets that much more exciting.”

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