By Akram Gharbi, Credit Fund Manager, La Française AM
We wanted to take advantage of the recent pause in the rally that we have witnessed in the Global High Yield market from January to April 2019 to explore more in detail recent developments and mounting volatility due to Trade War discussions. As you will see in our analysis, technical and fundamentals factors are still positive and valuations, which were considered a bit expensive, are slightly less so today. At La Francaise, we still believe that we could see more volatility in the days / weeks to come because of trade war discussions, the political noise in Europe, Brexit, etc. Nevertheless, there could be interesting new entry points in this strategy for long-term investors.
Currents convictions
1. Technical factors : well oriented
Technical factors are supportive of the credit market and the global high yield segment. As shown in the following graph, negative nominal yielding assets have continued to grow as a % of the total fixed income universe and are now approaching 20%.
As we have mentioned in the past, the search for assets delivering positive yields with a relatively good liquidity will favor a carry product, especially High Yield and subordinated bonds (AT1 Cocos and Hybrids).
Another positive technical factor is Net Supply: the net supply of High Yield is widely negative in the US and flat in Europe (with a downward trend over the past three years). The factors that explain the decrease in net supply in the US and in Europe are the relative growth of new issues in the loan market versus the HY market and the increase in the number of rising stars. The combination of these two factors combined has limited the amount of available paper on the market.