Market clouds part to shine light on high yield opportunity
Disrupted markets and high volatility levels have stabilised enough to create selective investment opportunities across a range of high yield bonds in the opinion of Insight Investment¹ (part of BNY Mellon Investment Management) high yield portfolio manager Ulrich Gerhard.
After a torrid first quarter of 2020, and despite ongoing bouts of volatility, Insight portfolio manager Ulrich Gerhard believes markets are now stabilising, with the corporate bond market once again opening up for issuance from strong companies. Central bank intervention, such as that from the US Federal Reserve (Fed) and Bank of England, is helping to ease financial stress on companies, particularly smaller ones, which in turn is also bolstering the corporate debt market, Gerhard notes.
Despite the tough trading conditions markets have gone through, Gerhard sees considerable investment opportunity, with many so-called fallen angels likely to provide potentially attractive buying opportunities.
“Markets have stabilised after the Fed decided to support fallen angels and also indicated a desire to buy high yield ETF’s. Furthermore the European Central Bank will allow banks to use fallen angels as collateral in its Long-term Refinancing Operation,” he adds.
Gerhard sees specific potential in high yield companies involved in areas such as lab testing and satellite radio and cable – with home working providing a boost to such sectors. He also points out that telecommunications and media, packaging and food can be stable and solid cash flow generators even during economic slowdowns.
While certain sectors are offering buying opportunities, Gerhard adds others are clearly stressed or appear un-investable at this time. For him, such areas include aerospace, airlines, energy, entertainment, retail, publishing and transportation. Spread levels in such sectors remain over +1000 basis points (as at end of April), he adds.
While energy stocks make up a large portion of some high yield markets, such as the US, it isn’t a homogenous sector. Within his own short-dated high yield strategy Gerhard says he is comfortable with his energy holdings.
The weighting to the energy sector was reduced from 13% (as of Feb 29th) to 9.6% by the end of April, namely (in reaction to the energy-related credit sell-off and as of 30 April it was at 10% as we added an investment grade rated refining company at very attractive levels. Gerhard points out the vast majority of his weighting is focused on upstream operations split between oil and gas production, refining and pipelines) Gerhard also believes short-dated high yield issues can offer much less volatility than the broader high yield market and as such sees plenty of opportunities to deploy the cash position his team amassed amid the volatile March period.
“We remain extremely cautious, but opportunistic, as we continue to work through the effects of the global shutdown. We are actively engaging with the management teams of all the companies we invest in and have found these discussions reassuring. Our main purchases have been non-cyclical companies that have sold off with the market, despite having robust business profiles and cash flows. We are finding some very attractive opportunities for the fund.
“New issue markets have reopened for some credits for names with proven business models. Companies are also in a much better position today re their cash burn per month, allowing investors to make a better assessment with regards to how many months a company can stay alive during a total shutdown. In this respect, cash and newly raised cash are vitally important. This has also provided investors with more confidence to invest at more attractive levels, though credit spreads remain elevated for the foreseeable future,” he concludes.
Oil & Gas
Oil & Gas
Oil & Gas Service
Oil & Gas Service
Sector allocations at 01.05.2020. Source: Insight Investment
¹Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds.
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