Aberdeen’s Greg Hopper favours ‘CCC’ over ‘B’ and ‘BB’ in ongoing environment
Greg Hopper, head of Global High Yield at Aberdeen Asset Management, believes that the opportunity for developed market central banks to raise interest rates is limited this year, and the ongoing environment favours ‘CCC’ bonds for high yield investors.
In what is likely to be a mild acceleration of the slow growth environment of the past several years, we expect tightening credit spreads to at least absorb what are likely to be small increases in government bond yields.
These offsetting influences are likely to result in a total return of about 6% for US high yield – very much similar to the track that 2013 returns are currently etching as we close the year. It should be noted that the spread tightening required to offset the kind of interest rate increases likely to occur in a slow growth environment would still leave credit spreads well above their historic lows.
We expect a similar scenario in Europe, where lower growth will limit interest rate moves but where a substantial amount of credit tightening has already anticipated what credit improvement can be expected. We believe that non-investment grade emerging market corporates will benefit the most from the improving global economy and a continued search for yield in what will still be a painfully low yield environment. 2013 saw this sector of the global high yield market widen out to historically wide levels versus US sub-investment grade corporate bonds on what we believe are exaggerated fears about the impact of US Federal Reserve tapering on emerging market economies, and thus has the most room to improve if the markets worst fears are left unfulfilled.
Along the rating curve, we expect that this environment will continue to favour triple C securities over single B and single B over higher quality BB bonds. While longer duration bonds of all stripes will probably be most vulnerable, the unusually steep slope of both the government curve and the credit yield curves may already discount a substantial part of their vulnerability going forward. Within the loan market we believe that there is value among European issuers and in special situations globally.
We believe that the largest risk to our outlook rests in the possibility of a renewal of declining growth. This kind of a negative scenario could be caused by overly stringent and coincident fiscal restraint on the part of the major economies, the failure of consumer or capital spending to react positively in any way to continued accommodative monetary policy, or a major geo-political event.