Commentaries

Commentaries

9 February 2024

Multi-Asset Credit Strategy Monthly Comment - January 2024

January saw a continuation of the trend started we observed in the last quarter of 2023. Invigorated by dovish signals from Central banks, risky markets rallied while global spreads tightened. 
On the monetary front, the ECB held rates as expected, but Lagarde surprised markets dovishly by pointing to continued disinflation dynamics, declining wage dynamics and strong monetary policy passthrough. She also mentioned that the ECB will have gathered a lot of information in the next few months, suggesting it may not be necessary to wait with cuts until June. Lower French inflation, weak German retail sales, and probably benign regional inflation measures out of Germany have also brought cut expectations forward, seeing 85% chances for a cut by April, and rates falling to 2.5% by December. Also, the Federal Reserve meeting cemented the end of their aggressive campaign to push up interest rates and sought to reset expectations for how soon and how fast they will cut this year as inflation pressures fade. While policymakers are shifting their focus to deciding when to start easing policy amid a favourable pullback in inflation, it’s clear they’re in no rush to lower rates. Chair Jerome Powell said officials would move patiently and doused speculation that rate cuts would start at the next meeting. Powell made it clear that the committee is not yet ready to cut interest rates as soon as the next meeting in March, saying that a move likely won't be appropriate until they gain more confidence that ‘inflation is moving sustainably toward 2%.’1
During the month, the strategy posted a positive performance with all asset classes posting positive performances. The portfolio continues to be cautiously positioned and we maintain a portion of our P&L hedged to mitigate against potential volatility coming from an unexpected negative surprise.
We see 2024 as a year of policy easing and are overall constructive in credit. The forward path of monetary policy will continue to act as the main driver of markets in the near term, and the timing and magnitude of rate cuts from developed markets central banks will unquestionably be driven by upcoming economic data over the next few months. However, the progress made on the inflation front - and economic growth estimates that continue to be revised higher in the US - has increased confidence in the central banks’ ability to engineer a soft landing.
We think the likelihood of a significant deterioration in credit is low at the moment, and spreads/defaults will continue to remain relatively well anchored as we move through the first half of this year. With all-in yields in credit still above their longer-term averages, we continue to expect assets to flow back into credit and other areas of fixed income, a powerful technical driver of performance. We see scope for further spread tightening over the course of the year, albeit we expect much of the return to come from carry. We expressed this view mostly via selected defensive BB rated credits and Tier 1 financials. We continue to think that BBB CLO tranches, yielding 8%, are an extremely attractive opportunity in the current market context.
1 Powell Q&A Post Fed meeting 
*Source of Market Data: Bloomberg

 

 

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