While the Trump victory is a surprise to most, it’s important to remember that high yield markets have weathered macroeconomic and geopolitical storms almost continuously since the financial crisis of ‘08/’09. We saw risk flare-ups around the Greek debt crisis, the US credit rating downgrade, the taper tantrum, and most recently, related to energy and commodity distress and the surprise Brexit vote.
Each time, the resulting volatility created opportunities for active high yield managers, and increasingly, the market seems to be taking these events in stride. This may be a reflection of views like ours at Barings that fundamentals drive returns over the long-term in high yield markets and that fundamentals, by and large, look stable.
All else equal, a Trump administration may, at least to start, involve more uncertainty than a Clinton administration would have from the market’s perspective as it remains unclear how much of the candidate’s election rhetoric will turn into action and how much will remain just that—rhetoric. Either way, the US political system is set up to have checks and balances, making any quick, radical changes unlikely. Additionally, some of the potential changes, like rolling back regulations and cutting taxes, if enacted, could prove beneficial for some industries.
Overall, we continue to believe that the US and European economies are on reasonable footing and provide a solid backdrop for high yield credit issuers; the surprise Trump victory does not change this. In a similar fashion to the Brexit vote, we would expect to see near-term volatility continue in the days and weeks to come as the market digests the long-term implications. As we have done for other geopolitical shocks, we will be closely monitoring high yield markets for opportunities where credit prices decouple from fundamentals.
Michael Freno, head of US and Global High Yield Investments at Barings