Opportunities in US high yield
By Jennifer Ponce de Leon, senior porfolio manager and head of US High Yield, Columbia Threadneedle Investments
- Given the recent volatility and continued sell off in US high yield, we believe the asset class is offering an attractive relative investment opportunity as valuations have widened to provide appropriate compensation for the risks facing the market today.
- Although we retain a cautious stance for 2016, we remain constructive on much of the non-commodity-related high yield opportunity set.
- Credit fundamentals continue to remain adequate and support the asset class with reasonable earnings growth, low default rates, access to capital at reasonable rates and solid, yet contracting, enterprise value multiples underpinning debt levels.
- We expect 3-4% returns for the asset class in 2016.
Thus far, 2016 continues to offer investors largely the same set of challenges as 2015. However, this year has a different valuation starting point, which offers additional compensation for these risks.
Absolute returns will depend on the resilience of the US economy and the feedback loop of stalled out global growth, as well as the market’s reaction to deviating central bank policies and less aggressive capital markets.
This could potentially lead to caution with company management teams and the resulting impact on corporate growth.
At the moment, there is a lot of uncertainty, with few obvious positive catalysts as the market looks for further confirmation on the direction and magnitude of global growth. We continue to advocate a dollar-cost-averaging approach in the event valuations overshoot, as liquidity has been challenging over the past few months.