Swiss asset manager Fisch has predicted that the high-yield market will see a rebound this year, particularly in Europe.
The piece, written by Kyle Kloc, senior portfolio manager at Fisch Asset Management, states the firm is cautiously optimistic that high-yield bonds will not see a second consecutive negative year. This, according to Kloc, has been a historic pattern that he does not see being broken in 2023.
He added: “The first half of the year nevertheless looks set to be rather more difficult, with many companies having to cope with declining profits as a result of weak—or negative— economic growth and inflationary pressures. We, therefore, expect spreads to widen in the first six months, before narrowing again in the second half of the year.”
While high-yield issuers look to be a in fundamentally good position, Kloc said Fisch expects some deterioration in this position over the year.
He added: “Although debt is unlikely to increase, a drop in Ebitda will lead to a higher debt ratio, while the rise in interest costs will impact free cash flow. We, therefore, expect default rates to climb this year – probably to around 4% in the US and Europe. In emerging markets, meanwhile, default rates should remain around 10%, mainly as a result of further defaults in the Chinese real estate sector. A sharp rise in default rates does not appear to be on the cards, as the number of bonds maturing in 2023 is still relatively low.”
Kloc stated the firm is more attracted to the European market, despite the US being able to cushion the impact of potential outflows.
He wrote: “We nevertheless prefer euro high yield bonds, as – for the same rating – they offer investors a higher spread than their US peers—and all the more so the lower the rating. In addition, the euro high yield market is rather more defensive overall because of its higher average rating and lower duration.”
He concludes: “In general we expect investors to return to the high yield market, which has been the subject of significant outflows over the past two years. With interest rates at a more ‘reasonable’ level, monetary policy should help the high yield market to gradually move away from the conditions of the last fifteen years, and back to those seen before the global financial crisis, resulting in a positive performance this year.”
