Credit investors find bright spots in gloomy outlook: Credit Rendezvous Q4 2022
To read the 15-page Credit Rendezvous, an overview of 14 segments of the credit market, click here. This quarterly Creditflux report covers widely traded assets such as CLOs and CDS, through to buy and hold investments such as distressed debt, and everything in between
Clouds are looming over financial markets as the fourth quarter begins — so investors are moving away from diversified approaches in favour of tailored investments and relative value plays.
Russia has annexed parts of Ukraine and stepped-up its aggression, the US has reopened a trade war with China over microchips, the UK is routing asset managers with a self-induced gilt crisis, and Europe is readying for a winter of intense energy costs.
As a result, credit entered the quarter at record wide spreads for the year, with volatility high. A growing number of high yield companies are at near-default valuations and some IG names look like fallen angels.
But Mick Vasilache of Chenavari says the gloom of implied default rates is overdone, even though few are confident in a macro long bet. Instead, this quarter will require intensive sifting of opportunities from cyclically and thematically challenged sectors, geographies and ratings bands — credit selection will be paramount, as Sona’s John Aylward points out.
Meanwhile, rates policy has brought leveraged loans and other floating rate instruments to an inflection point, as Sinjin Bowron of Beach Point Capital acknowledges. CLO managers need to explore different approaches on asset selection at a time when primary market sourcing is among the biggest challenges.
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