CREDIT CHAPTER
“SHORT DURATION HIGH YIELDING CREDIT WILL BE THE SWEET SPOT FOR INVESTORS IN 2022, PARTICULARLY GIVEN THE MARKET EXPECTATIONS FOR HIGHER GOVERNMENT BOND YIELDS ACROSS DEVELOPED MARKETS.”
PHILIP CRATE
PORTFOLIO MANAGER, ALTANA CORPORATE BOND FUND, ALTANA WEALTH
2
022 is going to be a tricky year for credit investors. Inflation concerns will pressure central banks into withdrawing their asset purchase programmes and to start hiking interest rates, which will put upward pressure on government bond yields. We expect the Fed to undertake a faster pace of taper, which will give them greater optionality for an earlier liftoff in rates, and two, if not three, rate hikes. We also expect the Bank of England to raise interest rates, while the ECB is likely to remain on hold. A supportive and continuing accommodative ECB versus a more hawkish Fed is one main reason why we prefer EUR over USD credit entering 2022. A rising yield environment will likely result in negative total returns for investment grade credit across the major currencies, although high yield is expected to eke out a positive return (+2 per cent – 3
25
per cent), given higher carry and another year of low credit losses, as 2022 is expected to be a benign year for defaults. The rapid spread of new Covid-19 variant Omicron could negatively affect credit performance in the early part of 2022 by triggering further restrictions across economies, with negative implications for travel and consumer discretionary sectors. We would view any selloff among the better capitalised players in these sectors as a buy opportunity. Putting these specific sectors to one side, we do not anticipate that the new variant will trigger any drawdown of a similar magnitude to March 2020. Overall, we expect credit risk premiums to finish 2022 broadly where they started. But they will face periods of volatility as credit spreads widen on concerns about the inflation outlook and central
bank responses, as well as new Covid-19 headlines. At some point, dip buyers will be attracted, and the widening will be reversed ahead of the next headline. We also expect dispersion for sector performance to increase, and this will provide opportunities for the better credit funds to outperform. Given our opportunistic and flexible trading strategy which focuses on short duration event-driven credit, our fund is wellpositioned to outperform again. Short duration high yielding credit will be the sweet spot for investors in 2022, particularly given the market expectations for higher government bond yields across developed markets.
HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022
