Schroders' Wes Sparks, Head of US Fixed Income and fund manager of Schroder ISF Global Corporate Bond, favours US corporate bonds to those in Europe and is overweight banking, insurance, communications, transportation and the consumer sectors.
Outlook
"At the moment we favour corporate bonds in the US to those in Europe, both from a fundamental as well as valuation perspective. The combination of recent quantitative easing and low interest rates will support on-going demand for credit risk in the US. Corporate fundamentals in the US would be more stable than European companies, where on-going austerity measures will reduce demand. The US also continues to have attractively priced new issues come to market, which offers good opportunities to add exposure. We have also found attractive investments in selective corporate bonds in Brazil, Mexico, Canada, and the UK in recent months. In contrast, we are particularly cautious on Spanish corporate bonds at the moment because of potential downgrades to below investment grade in coming months, and we are cautious on corporate bonds in some emerging markets countries where we've had concerns over corporate governance, structural issues, liquidity, or a lack of proper disclosure, such as in China and Indonesia."
Portfolio Positioning
"We remain constructive on credit, even after the strong rally in the 3rd quarter. We have a preference for selectively chosen higher yielding bonds as we see income (carry) the primary component of returns over the next 12 months, so we are overweight BBBs and we have approximately 7% exposure to high yield (inside of the maximum permitted high yield allocation of 20%). We favour those companies that are still focused on deleveraging or else have solid profitability and stable cash flows."
Sector:
"By sector, we are overweight banking, insurance, communications, transportation, and the consumer sectors. We see financials continuing to offer value relative to industrials, but that differential is gradually fading. We expect default rates to remain relatively low and hence hold high yield bonds, particularly in select industries that tend to have more stable cash flows such as in communications and pipelines."
Currency:
"In terms of currency, we are overweight USD credit due to solid credit fundamentals of the USD issuer universe and the better liquidity in that market. We also favour GBP credit against an underweight in EUR credit."
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