Eaton Vance urges caution in credit markets

While the recent run of record global economic expansion has been good for credit and other asset classes, investors should not become complacent, according to Eaton Vance.

In a recent paper, the investment manager’s multi-asset credit team explained why, despite today’s favourable conditions, the current environment warrants a cautious stance.

“We believe that late-cycle pressures are building and a turn in the cycle is on the horizon,” said Eaton Vance global high yield group portfolio manager, Jeffrey Mueller.

“Of course, a deterioration could be triggered by other factors such as policy mistakes by central banks or geopolitical risks such as a trade war. As such, the continued strength of today’s expansion should not give way to complacency.

“Given our outlook, we believe preparedness is warranted; in particular, as market turns are often swift and unexpected.”

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Mueller said his team believes that a defensive approach that favoured higher-quality assets further up the capital structure and with lower duration is warranted.

Likewise, he said taking a bottom-up approach is essential for understanding where value opportunities exist, but without excessive levels of underlying risk.

“When we begin to see more change than continuity in the cycle, so, too, will we see the benefits of playing it safe,” Mueller said.

“At the sector level, we find loans to be the most compelling at present. Across all credit sectors, tight valuations make careful security selection vital for identifying opportunities with attractive return potential and defensive attributes that are well suited to late-cycle positioning.”