PERSPECTIVE3-5 min to read

Video: Why is it now a good time to invest in credit?

The Federal Reserve's consecutive interest rate hikes within a short period of time last year had a negative impact on the credit markets. However, headwinds have now gradually subsided, and investors should consider increasing their allocation to credit investments as soon as possible. This short video explains why now is a good time to invest in credit.

20/10/2023

Authors

Swa Wu
Investment Director, Fixed Income, Hong Kong

The Federal Reserve's consecutive interest rate hikes within a short period of time last year had a negative impact on the credit markets. However, headwinds have now gradually subsided, and investors should consider increasing their allocation to credit investments as soon as possible.

First of all, we believe that the Federal Reserve's interest rate hiking cycle has peaked, allowing investors to benefit from higher yields after the rate hikes. The likelihood of further interest rate increases is low, which means the potential for capital losses from rising rates has also reduced. That’s why this is a good time to start increasing asset allocation to credit.

Adding to this, high-quality credit have the potential to provide more stability and lower default risk compared to government bonds in light of an uneven global economic growth environment. They can offer more attractive investment opportunities in terms of yield.

What's more, if investors are overly concerned about the risk of interest rate hikes, they may miss out on gains in the bond market seen so far this year. If they allocate too much of their investments in the US, they may miss out on quality choices in Europe, the UK, and other markets. For example, European credit has seen a 4.3% increase since the beginning of this year, and has contributed significantly to the 2.9% gain in the global credit market. Meanwhile, US credit only rose by 2.4% during the same period*.

In terms of investment themes, global credit in 2023 has been benefiting from the wide economic restart after the pandemic, the recovery of global travel, increased consumer demand, the thriving e-commerce sector, and more. Holding government bonds may not let investors fully capture the investment opportunities that these thematic bonds present.

Furthermore, the financial health of most companies has improved since the outbreak of the pandemic. For example, the default risk for US companies is only 3%, which is in line with the 25-year average, while the default risk for European companies is even lower at below 2%*. Because of reduced risks surrounding a potential severe economic downturn and corporate defaults, we believe investors can consider entering the credit market.

*Source: ICE Indices, as of August 31, 2023. Total Return, USD Hedged

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Authors

Swa Wu
Investment Director, Fixed Income, Hong Kong

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