Central bank activity holding back credit markets
Central bank activity and communication are the main factors driving Robeco’s cautious stance towards credit markets for the first quarter of 2022.
Robeco director and portfolio manager, Sustainable Development Goals credits, Erik Keller said his fund arrived at its cautious outlook for credit markets through an analysis of three elements. That being economic and corporate fundamentals, valuations in global credit markets and technical factors such as central bank behaviours.
“We still see so many distorting elements at play in the global economy, if we think about supply chain disruptions for example, that we do want to be humble in terms of the economic prognosis and also, the ever more cautious view on the outlook for credit markets,” he said.
In Robeco’s Q1 2022 credit market outlook, Sander Bus, credit team co-head, said technical looked weak.
“There are too many risk premia that are not well priced. This combined with the clear central bank hesitation in discerning the most appropriate path forward for policy, might prompt flows out of risky assets,” Bus said.
Keller said credit markets in the western market were healthy from a fundamental perspective but continued supply chain disruptions and a downward acceleration of Chinese economy showed “clouds on the horizon”.
Keller said the firm saw market weakness in November in valuations due to the Omicron variant but a lot of it had reversed by the end of the year.
“So, from a bottom up perspective, we think there are still opportunities, but in that sense, we do expect… more market volatility, and that means that we want to be cautious currently and wait for more volatility,” Keller said.
“Because that could also mean that you see higher yields, higher spreads and at some point, that is a better entry point for us to increase risks in our credit portfolios.”
In Robeco’s credit market report, Victor Verbck, credit team co-head, said: “We do see the opportunities opening up in selected emerging markets ex-China, as well as in financials, BB-rated credit, Euro swap spreads or COVID-recovery plays.
“We remain overweight EUR over US credit, given where valuations are. We would adjust this on any back up in the US credit market.”
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