This document is a financial promotion for The First Sentier Global Credit Strategy. This information is for professional clients only in the EEA and elsewhere where lawful. Investing involves certain risks including:
- The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back significantly less than the original amount invested.
- Currency risk: the Fund invests in assets which are denominated in other currencies; changes in exchange rates will affect the value of the Fund and could create losses. Currency control decisions made by governments could affect the value of the Fund's investments and could cause the Fund to defer or suspend redemptions of its shares.
- Credit risk: the issuers of bonds or similar investments that the Fund buys may get into financial difficulty and may not pay income or repay capital to the Fund when due.
- Interest rate risk: bond prices have an inverse relationship with interest rates such that when interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall.
- Charges to capital risk: The fees and expenses may be charged against the capital property. Deducting expenses from capital reduces the potential for capital growth.
- Derivative risk: derivatives are sensitive to changes in the value of the underlying asset(s) and/or the level of the rate(s) from which they derive their value. A small movement in the value of the assets or rates may result in gains or losses that are greater than the amount the Fund has invested in derivative transactions, which may have a significant impact on the value of the Fund.
- Sovereign debt risk: the Fund may invest substantially in government debt which is exposed to political, social and economic risks. In adverse situations, sovereign issuers may not be able or willing to repay the principal and/or interest when due and the Funds may suffer significant losses.
- Below investment grade risk: below investment grade debt securities are speculative and involve a greater risk of default and price changes than investment grade debt securities. In periods of general economic difficulty, the market prices of these types of securities may decline significantly.
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For a full description of the terms of investment and the risks please see the Prospectus and Key Investor Information Document for each Fund.
If you are in any doubt as to the suitability of our funds for your investment needs, please seek investment advice.
The health of corporate balance sheets and anticipation of resilient earnings are among factors potentially benefiting global credit this year.
1. Prospective returns from the asset class have risen
The uptrend in bond yields globally in 2022 has pushed the prospective yield of credit portfolios close to the highest level in more than a decade.
First Sentier Wholesale Global Credit Income Fund – yield
Source: First Sentier Investors. Data shown March 2014 December 2022
Yields on other income-producing investment options are rising too. One-year term deposit rates went from around 0.25% a year ago to more than 3% today, and yields on government bonds rose in 2022 too. But neither currently come close to the prospective yields available from global credit.
We expect global credit yields to remain elevated throughout this year, which could prove enticing for income-oriented investors in particular.
2. Corporate balance sheets appear to be in good shape
Large companies worldwide are in the process of releasing their financial results for the December quarter and for the 2022 calendar year as a whole. Early indications suggest most firms remain in healthy shape financially.
While it’s possible the default levels might rise back up towards long-term average levels from an extremely low base, we’re not anticipating a meaningful pickup in default rates among corporate issuers.
Encouragingly, the volume of corporate bonds with ‘negative’ outlooks from major rating agencies is close to the lowest level on record1.
More importantly, higher default rates across the broader market will only affect portfolios if one of the companies in the portfolio defaults, either by missing a regular coupon payment or being unable to repay its debt on the maturity date.
It’s very important to avoid the failures, so we’re always on the lookout for signs of distress and aim to sell bonds before escalating default risk starts to affect their valuation.
3. Any economic downturn could be quite modest
The latest forecasts from the International Monetary Fund2 suggest major economies will be quite resilient this year, despite headwinds from higher interest rates, ongoing supply-chain bottlenecks, and secondary impacts of the war in Ukraine. Any recessions are expected to be short and shallow in nature.
We expect to see lower levels of economic activity in some areas, but is encouraging that the International Monetary Fund still projects global economic growth to be 2.9% in 2023; only down modestly from an estimated 3.4% last year.
Credit investors should be reassured by these latest projections, as there’s generally quite a strong correlation between economic activity levels and company profitability. As long as companies can service their debt repayment obligations, the regular income stream from coupons will support returns from global credit portfolios.
4. An uptick in activity among institutional investors
Institutional investors seem to be sitting up and taking notice of the higher prospective returns on offer.
We have seen an uptick in due diligence with prospective investors considering increasing exposure to the asset class. Sophisticated investors in the US, Europe and elsewhere, including pension funds and sovereign wealth funds, are among the prospective investors looking to allocate to corporate credit portfolios. This is important, as sizeable inflows into the asset class typically help support valuations.
During January, we saw a good level of new corporate bond issuance. More than US$160 billion of new corporate bonds were issued in the US alone during the month3, which ranks among the highest January totals on record.
Encouragingly, all of this new issuance was comfortably digested by the market. This underlines the demand for credit worldwide and signals that there may still be large amounts of money sitting on the side lines ready to be deployed in high quality, yielding investments. This could help ensure new issues remain well-supported, and also potentially boost the valuations of existing securities trading in secondary markets.
5. Potential for performance divergence from different companies
Operating conditions always vary for different firms, both geographically and across industry sectors.
While the overall outlook for credit remains encouraging, there will almost certainly be pockets of weakness to avoid. This underlines the value of active management in this asset class.
Over the past two years or so we’ve seen problems with Chinese property developers, for example, many of which had borrowed too much money and weren’t able to repay their debt following a slowdown in demand and an associated drop in revenue.
On the flipside, we generally favour firms with pricing power in their respective industries, as they are less prone to margin erosion and are therefore least at risk of running into financial difficulty.
Avoiding the blow-ups helps preserve capital and can result in our funds outperforming credit benchmarks and peers that might have some exposure to the defaulting firms.
1 Source: Bloomberg, as at 1 January 2023
2 International Monetary Fund World Economic Outlook Update, published January 2023
3 Source: Bloomberg, as at 1 February 2023
This document has been prepared for informational purposes only and is only intended to provide a summary of the subject matter covered and does not purport to be comprehensive. The views expressed are the views of the writer at the time of issue and may change over time. It does not constitute investment advice and/or a recommendation and should not be used as the basis of any investment decision. This document is not an offer document and does not constitute an offer or invitation or investment recommendation to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this document.
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