PERSPECTIVE3-5 min to read

Year Ahead 2024: Global Credit – what can investors expect?

19/12/2023

Authors

Julien Houdain
Head of Global Unconstrained Fixed Income

What can credit investors expect in 2024?

No investors have felt the economic regime shift of the past two years more keenly than those in fixed income markets.

But the last two years are behind us and as we start a new chapter, we must shift our focus towards the opportunities that lie ahead. The outlook for fixed income is fast improving.

Our innovative scenario-based approach has a soft-landing as our baseline, but we place a probability of 30% on a hard landing. Therefore, nimble portfolio management and careful bottom-up bond selection is critical to avoid the weakest links and generate returns.

Despite still elevated inflation, real yields on higher quality bonds now stand at their highest levels in 15 years. These yields on offer in corporate bonds provide a cushion against losses, but given the risks around a hard landing, we prefer to play it relatively safe.

Which parts of the global credit market look attractive? *

We prefer investment grade over high yield, where we see good value in European credit and short-dated US. We favour allocations to covered bonds, government related and securitised debt as a high quality, lower beta way of adding yield to a portfolio.                                                                               

How will central banks rate cutting cycle likely to affect credit markets? *

With central banks all but finished tightening, the market is now focussing attention on the start of cutting cycles in 2024. Historically this has been when investing in bonds has been the most rewarding. **

This could potentially lead to a steepening of yield curves, which is a high conviction view. We see value in strategies that benefit from yield curve steepening across markets worldwide.

Nevertheless, monetary tightening will hit some economies quicker than others. The pass-through from higher interest rates is being felt more quickly in Europe than the US, for example, leading to slower growth.

As a result, we expect there to be greater market dispersion, both regionally and by issuer, as investors will need compensation for allocating to more levered corporates.

This creates opportunities in 2024 for active management and careful bond selection to deliver attractive returns.

* For illustrative purposes only and does not constitute to any recommendations to invest in the above-mentioned security/sector/country..

** Past performance is not a guide to future performance and may not be repeated



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Authors

Julien Houdain
Head of Global Unconstrained Fixed Income

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