From diagnosis to investing: capturing medtech opportunities
The investing potential of the future world – medical technology
The pursuit of income is a continuous journey. Over the past decade, income investors like us have stayed the course as we ride through the four seasons, employing an active investing approach as we navigate the markets’ ups and downs. With interest rates looking to stay at ultra-low levels for longer, active management, which integrates macro asset allocation views and the bottom-up, yield-focused insights of asset class specialists, is crucial in tapping income opportunities through the seasons.
Exploring high-yield potential as winter passes by1
After a tumultuous 2020, investors are keeping a close tab on the process of economic reopening around the world. Returns from traditional bond sectors have become relatively unattractive as unprecedented monetary and fiscal policies are keeping rates lower for longer, alongside the possibility of rising inflation further down the road.
Fixed income assets with high-yielding potential like HY bonds have thus become a relatively attractive income source to a multi-asset portfolio. Yield of US HY credit stood at 4.2%3, as of end-December 2020, a comparative compelling level compared with traditional income sectors such as government bonds.
Cash and most government bonds are delivering negative real yields3
‘Green shoots’ potential in the spring as opportunities emerge in high yield
From an asset allocation perspective, we believe potential opportunities in HY bonds are emerging with defaults on the decline and relatively attractive yield potential.
1. Defaults began to decline
With the US Federal Reserve committed to its asset purchases programme and holding rates at near zero, companies could continue to raise public financing to repay their debt and deleverage their balance sheets. Gross new issuance of US HY bonds reached US$450 billion for 2020 through end-December5.
Additionally, European HY bonds also offer potential diversification benefits as they are generally of higher quality and have shorter duration.
2. Attractive yield potential
Active management through all seasons
|How does JPMorgan Multi Income Fund actively manage its HY allocation7?|
2018 (added a quality tilt to navigate the late cycle)
TO EUROPEAN HY
The European high-yield market has a higher credit quality profile and shorter duration than its US counterpart, and provides a source of diversification for our still significant allocation to US high yield.
The recent political and trade-related volatility in European high-yield markets has pushed European credit spreads wider than those in the US market. This dynamic presents an attractive relative value opportunity, as the European high-yield market traditionally trades with narrower spreads than the US market, given its higher credit quality profile.
2021 (recovering from the global public health crisis)
WITH HIGH DEFAULT RISK
Some sectors such as energy and basic materials are facing considerable financial pressures, and we continue to take an active investing approach and a focus on quality to minimise allocation into sectors that are facing potentially higher default risk.
Moving into 2021, the economy is still recovering from the public health crisis. Taking an active investing approach and a focus on high-quality issuers as well as keeping an eye on liquidity conditions are crucial to optimise the relatively attractive valuations and to better manage any default risk.
With a recovering economy and defaults on the decline, interest in HY bonds is gaining traction, especially as rates continue to stay low for longer. Investors, depending on their investment objectives and risk appetite, could keep an eye on the emerging opportunities in HY bonds for higher income potential.