1. Newsroom
  2. Optimising high-yield exposure in 2021
Menu
UBP in the press 08.03.2021

Optimising high-yield exposure in 2021

Optimising high-yield exposure in 2021

Institutional Money (04.03.2021) - In spite of the global pandemic, an increase in default rates, and highly volatile investment markets, the global high-yield market delivered positive returns in 2020. 


With this in mind, a common question we are asked is whether or not we expect the high-yield market to deliver positive returns in 2021.

Although timings differ, we see the vaccine rollout as leading to a synchronised global growth recovery. For example, the US and UK will be the initial beneficiaries, given their faster pace of vaccine distribution; however, the EU will follow on shortly after, as supply constraints will soon be lifted. At the same time, stimulus measures are being seen in both regions, with QE programmes continuing at full force, while fiscal policy, in particular following the “Blue Sweep” in the US, should provide another boost to growth. In Europe, the setting up of the EU Recovery Fund will ensure continued fiscal help for the region, where, although there has been some concern as regards the distribution and use of the Fund, the appointment of Mario Draghi as Italy’s prime minister should buoy investor confidence.

We believe this macroeconomic backdrop is positive for risk markets, particularly the high-yield space.

Unlike other fixed-income asset classes, high-yield spreads have not yet recovered to the lows reached prior to the COVID-19 pandemic, implying that, should they do so, investors in high yield would enjoy capital gains in addition to their carry. Similarly, we expect default levels to be contained this year following the increase experienced in 2020, when companies with weaker balance sheets were forced to default rapidly, as economies were effectively shut down overnight.

Recovery rates typically decline in recessions and 2020 was no exception, with recovery rates coming in line with previous recessionary periods.

These rates are also expected to return to more standard levels as economies reopen. With this cleansing of the high-yield market and the more optimistic recovery outlined above, we do not see excessive defaults as a concern for 2021.

One area we are paying particular attention to is interest rates. In response to the crisis and to ensure financial conditions remain loose, global central banks have cut interest rates to their effective lower bounds. Indeed, as economies begin to reopen and growth recovers, interest rates have begun rising, particularly at the middle- and back-end of interest rate curves. Given the favourable macroeconomic backdrop and expectations of further compression in high-yield spreads, coupled with the potential for further increases in interest rates, we currently favour adopting a hybrid approach of low interest rates and full credit exposure for our high-yield allocation.


Graub_Philippe_150x150.jpg
Philippe Gräub
Head of Global & Absolute Return Fixed Income 
Go to his Linkedin profile.

Bernard-McGrath_150x150.jpg
Bernard McGrath
Investment Specialist
Go to his Linkedin profile.

Expertise

Azioni globali

Investire in società con una creazione di valore superiore e sostenibile.


Altro da leggere

UBP in the press 14.06.2024

UBP's Strategic Vision of Pure-Play Private Banking in Southeast Asia

Hubbis (05.06.2024) - Hubbis met with Eric Morin recently to learn more about UBP’s current momentum in Southeast Asia, the bank’s key focus areas, his strategic priorities, and his vision for the future of private banking in the region.

UBP in the press 12.06.2024

Structured products: a strategic solution

Le Temps (10.06.2024) - Structured products have changed a great deal, after a long period in which they were treated with a degree of scepticism by investors, and as a result of tighter regulations. Although the number of clients using them remains very (too) small, they are likely to play a growing role in asset allocation strategies.

UBP in the press 11.06.2024

“Forget unrestricted market access to Europe”

Finanz und Wirtschaft, Monica Hegglin (08.06.2024) - The CEO of wealth management bank Union Bancaire Privée is focused on growth through acquisitions.