Multi-Asset Credit Strategy Monthly Comment - October 2023

Credit markets experienced a bumpy month as they were shaken by mounting geopolitical fears as Israel-Gaza tensions quickly erupted in a war. The market’s implications will depend on how broad the conflict evolves. If the war scope remains regional, the overall impact is unlikely to be material. However, the conflict enlargement could lead to heightened global tensions and material disruption to oil supply. On the monetary front Powell indicated that the Fed will be on hold at the upcoming November meeting but will continue to scrutiny data and potentially tightening at a later stage. Meanwhile, the European Central Bank (ECB) left its policy unchanged after ten consecutive meetings of hikes, emphasising that rates are at sufficiently restrictive levels, while using a cautious tone at the press conference. Monetary policy continues to transmit more forcefully than expected, as Bank Lending Survey confirmed and PMIs declined further. Consensus expects core inflation to fall further in the coming months, which underscores that the ECB is done hiking rates.
The earnings season so far mirrors the worsening of the economic outlook and gives macro investors signals on how headline data releases will shape up in the next coming months. European companies are generally doing worse than their US peers within the Eurozone’s worse macro backdrop. Across sectors, industrials and consumer discretionary corporates are issuing the most profit warnings – most of which are in the UK. 
The strategy finished the month with a small negative performance, with strong performance from CLO offset by weaker performance in the AT1 sector. The high carry embedded in the portfolio demonstrated its defensive characteristics and helped the strategy counterbalance the spread widening. With respect to strategy allocations, there were no major changes during the month and the portfolio continues to be cautiously positioned. We focused on trimming exposure to non-financial lowest rating categories while increasing our exposure to defensive corporate sectors. The strategy had a considerable portion of risk covered by hedge instruments to help providing some protection from macro volatility, as well as holding around 8% of NAV in cash.
Central banks should remain highly data dependent in the coming months as they near the end of their hiking cycles, with key focus on inflation and labour market data for signs of whether economies will avert a recession. Despite the uncertainty on global growth that still lies ahead, valuation looks compelling and we continue to view credit as an attractive asset class due to high all-in yields and low default rates, with a continued preference for subordinated financials and structured credit given strong fundamental tailwinds combined with elevated yields.
 

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