The Weekly Strategy Report (April 22, 2019)
- We are currently overweight U.S. high yield credit in our multi-asset portfolios even though it has historically struggled after Federal Reserve (Fed) tightening cycles; we anchor on default activity as a bellwether for the asset class’s performance in late cycle.
- During past recessions, high yield had smaller drawdowns than the S&P 500 in total return terms, but after stripping out the impact of duration from high yield returns, their declines were more similar. High yield did, however, recover its losses faster.
- Two important caveats for credit this time around are the prospect of a worse liquidity environment and the potential for historic level of fallen angels.
- Economic fundamentals have improved, consistent with our modest lean into risk and overweight to credit. The case for equities is more mixed, given current valuations and technical factors.
EXHIBIT 1: HIGH YIELD DEFAULT RATES GOING INTO RECESSIONS
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The value of investments and the income from them can fall as well as rise and investors may not get back the full amount invested. Past performance is not a guide to the future.