Multi-Asset Credit Strategy Monthly Comment - April 2024

April marked a change in tone from the positivity of Q1, as investors’ concern grew about sticky US inflation and growing geopolitical tensions. A combination of rising tensions in the Middle East, strong Consumer Price Index (CPI) and labour market data in the US in previous days all conspired to cause a correction in risky markets. Credit spreads remain well-behaved against the backdrop of hotter-than-expected inflation and continued rates volatility.

The Federal Reserve changed tone over likelihood of immediate cuts, following recent strength in US data. Chair Powell guided for higher interest rates for longer, as inflation and labour market momentum remain solid. He removed from his speech the notion of restrictive policy and the need for cuts this year, de facto removing a cut in June from the table. The Fed then went back to ‘on hold’ stance, until new information on inflation emerges. Markets are already priced for this outcome, with one cut and a half priced for 2024 (vs a high of six in January) and US two-year rates at 5%. We see both cuts and further hikes unlikely in the next six months. On the other side of the ocean, European Central Bank officials look quite confident the conditions required for a June cut are on track.

The strategy registered a small negative performance in April: financials and corporates were the main contributors, while structured credit continued delivering positive returns. The strong performance in structured credit was again led by BB- and BBB-rated Collateralised Loan Obligation (CLO) debt tranches. During the month we deployed new capital into selected BB new issues, with a bias towards European defensive issuers, and structured credit, particularly BBB CLOs. We continued looking for opportunities to reduce exposure to more cyclical single B corporates that we believe have become fairly valued.

Despite the uncertainty on global growth that still lies ahead, valuation looks compelling, with spreads at reasonable levels compared to historical averages and fundamentals remaining solid across sectors. We maintain our preference for bigger, stronger banks, which have a lower risk of entering stress events and could be systemically important, selected defensive BB and BBB rated corporates and BBB CLO tranches, yielding 7-8%, as we consider them as an extremely attractive opportunity in the current market context. As expectations for future policy rate decisions have evolved, we continue to favour the high income available from floating rate assets. In aggregate, we believe the portfolio is well-positioned with a yield-to-worst over 7% in EUR, an average price in the mid-90s.

*Rating Provider: S&P, Moody's and Fitch. Date of rating as of end of the month.

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