The high yield market is set to face a testing year as it will dance between good and bad market conditions, Citywire AA-rated Alexis Renault has said.
'It will be a succession of bull and bear markets conditions,' he said. 'We will have periods of market strength like we had at the beginning of January then weaker markets like we saw at the start of February.
'What we are seeing is the first alert and there will be others this year, so investors should be prepared to see more volatility.'
The short correction at the beginning of February links to new issues, Renault said. However, it is still very attractive for companies to issue debt rather than wait a year or two.
‘Even after this small market correction, it is still very cheap for a company to issue debt.
'Loan investors are taking market share in terms of new issues because they are less expensive but I am confident that there will be a good level of issuances this year on the high yield bond market.’
Renault is underweight cyclical companies in his credit fund as they are almost fully valued with no upside protection. He said it is, therefore, important to focus on shorter-dated debt.
He is focusing on three-to-five years because there will be room in the next year or two for spreads to move in the case of an economic slowdown.
Sticking to short-dated bonds in cyclicals is also key because the spreads aren’t very attractive and the company results are close to the peak.
When investing in the three-and-a-half-to-five year market, Renault looks for companies with a relatively defensive credit profile.
Over three years to the end of February 2018, the Oddo BHF Euro Credit Short Duration DP-EUR fund has returned 4.81% in euro terms. Its Citywire-assigned benchmark, the FTSE Euro Corporate Bond 1-3 Years TR, rose 1.58% over the same period of time.