Global high-yield markets have rallied following a difficult few months, but money management executives are divided over the outlook for the U.S. and European markets and where best to place their bets.
Europe is drawing renewed interest, thanks to unprecedented monetary policy, including a move further into negative territory and an extended and expanded asset purchase program. Concern over default rates and commodities exposure in the U.S. also is heightening Europe's appeal, managers said.
But both the U.S. and Europe look attractive right now. Investor sentiment on commodities, interest rates and other external factors will help to determine specific exposures.
“There is far more interest, and we are certainly seeing interest in the high-yielding sectors of the debt markets,” said Paul Cavalier, partner and head of Mercer LLC's bond boutique in London. “That is generally consistent with this hunt for yield, a move away from risk-free assets that are delivering poor expected returns going forward.”
Return expectations for U.S. high yield are about 7.7% for 2016, and for Europe, 4.5%, sources said. That compares with -4.6% and -9.5% in dollar terms, respectively, in 2015, show the BofA Merrill Lynch U.S. High Yield index and the BofA Merrill Lynch Euro High Yield index.
Defaults are expected to hover around 1% in Europe, but could move north of 5% in the U.S., due to its significant exposure to commodities.
“We continue to see a lot of interest in the asset class — I think even more out of Europe than the U.S., both for European high yield and U.S. dollar,” said Rob Cook, managing director and global head of high yield at J.P. Morgan Asset Management, based in Indianapolis. Appetite from Europe is down to “perhaps having a little more yield-starved environment.” J.P. Morgan Asset Management runs $57.9 billion in global high-yield strategies.
But while higher returns are forecast for the U.S., some executives warned that the country is in for a bumpier ride than Europe.
“At this point, the main difference is in the investor's outlook on commodity prices and the follow-through effect on (the) U.S. high-yield default rate in the energy and metals/mining space,” said John Yovanovic, head of portfolio management, high yield, at PineBridge Investments in Houston. “If commodity prices retrace lower, Europe will outperform; if they continue the current trend of moving higher, the U.S. may outperform. We anticipate similar returns on a constant currency basis.”