Money managers are getting worried about the global credit markets.
While company fundamentals look strong for 2014, high valuations and lower-quality credits issuing in the high-yield market in particular have led to neutral and underweight positions for allocations that in recent years have delivered double-digit returns.
“While not at the lowest, spreads have widened a bit on the back of a more nervous start to the new year, but we are not a long way above the levels of the boom years of the credit cycle — from 2005 to 2007 — when lots of money was chasing credit,” said John Stopford, London-based co-head of global multiasset at Investec Asset Management. Investec's valuations put high yield about “50 basis points expensive. That doesn't sound (like) a lot, but the market is pricing in a very favorable backdrop, with equity volatility close to low single digits and default rates around 2% to 3%, which historically was only really bettered in 2005 to 2007.”
The Credit Suisse High Yield index gained 14.7% in 2012, dropping to a gain of 7.5% for the year ended Dec. 31, 2013. This year is looking equally subdued, despite growth in the U.S. and Europe, strong corporate earnings forecasts and healthy balance sheets.
“Yields for European high yield are currently around 4.5%, so on an historical basis, we are observing close to all-time lows for the asset class,” said Adeel Shafiqullah, managing director of European leveraged finance at PineBridge Investments LLC, London.