By Alex Gitnik
Recent changes in the macroeconomic environment have created a more compelling case for Investment-Grade credit, also underscoring the specific benefits of the holistic approach.
Investment grade corporate bonds have long been favored by investors for their combination of high quality, liquidity and yield premium over government bonds. We believe that the current market environment puts this asset class in the limelight, given the more attractive valuations resulting from the recent widening of spreads. After starting the year with a spread (OAS) of less than 100 basis points (as measured by the Bloomberg Global Aggregate Corporate Index), we have seen it widen significantly in recent weeks to reach the current value. by nearly 150 basis points. The move reflects heightened concerns about global growth and inflation, but at this level investors are well compensated for the potential uncertainty in the macro backdrop.
First, the revised global outlook of weaker but still positive growth actually bodes well for global corporate bonds. Historically, looking at IG Credit’s performance under various economic conditions over the past 70 years, it has done better in the face of relatively moderate GDP growth between 1% and 3%. A more robust economic environment could incentivize companies to focus on satisfying shareholders, while a “middle ground” macroeconomic environment could indeed be more conducive to bondholders.
Additionally, as noted in our recent article, contagion pressure from recent geopolitical and macroeconomic events on credit markets has been relatively subdued, underpinning our constructive view. Corporate fundamentals have improved overall, with global industrial credit metrics essentially back to pre-COVID levels. Leverage continued to decline through the end of 2021 as companies remain focused on strengthening their credit profiles.
At the same time, we are seeing an increase in the level of dispersion within the Global IG Credit universe, particularly at the regional level. The spread difference between the European and American Investment-Grade universes has now reached 15 bps against a more common level of 2-3 bps. While this difference reflects heightened geopolitical risks in the region, we believe it also creates additional opportunities for stock picking. Many companies today issue bonds in both USD and EUR, so a global money manager can select the security that offers the best relative value.
Finally, in our constructive view on global credit, we are also mindful of the potential implications of higher interest rates. Much of the negative impact can be mitigated by a combination of credit spread tightening and carry. History shows that over the medium to long term, IG credit can generate positive total returns, even in a rising rate environment.
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