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7th July 2020

💷 HY Strategy Portfolio: 10%+ Profit in Under 3 Months

Market Overview

It’s very early days with a mixed start to the second half, but the key takeaway is that markets can continue to move higher. Economies are generally back in business. In some cases, further policy stimulus is coming, consumer confidence and industrial sentiment are recovering, while manufacturing and service sector activity hauls itself off the floor. It’s been a deep recession but also a ‘V’ recovery to start with.

The risks are clear, though. We have an earnings season coming up which isn’t going to be a good one, virus second waves are in evidence across several jurisdictions, and the US promises a more disjointed recovery as a result. China is being a nuisance in several key areas although it has pulled back (for now) in its confrontation on the disputed border with India.

In credit specifically, however, we are in the midst of a record run-rate in IG issuance, where Q2 saw €50bn or more issued in each of the months – the first time in Eurobond history. Few treasury desks are taking chances of something more sinister later in the year.

At €268bn of IG non-financial issuance year to date, we should be past the record €318bn from last year by the end of September – en route, quite possibly, to €400bn for the full-year.

The high yield market has finally plugged into the narrative. In a 6-week period from late February and taking in the whole of March, we didn’t get a single deal. But the primary machinery has started to churn them out now, with €13bn issued in June and July off to a decent start (€3.4bn).

And the pipeline builds. Last year’s full-year record total of €76.4bn looks like being surpassed IF risk markets don’t fall out of bed between now and year-end.

So the appetite for HY paper is recovering as the overall news flow improves. Low rates ‘forever’ and the ECB’s recent increased QE-related purchases have turned the screw. There’s a subliminal message in there somewhere. The crowding-out effect (in IG) will reinvigorate that bid for higher-yielding corporate debt.

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