Credit market leaders and laggards in the coronavirus sell-off
The value in credit is becoming more obvious. Few if any companies or sectors have been immune to the pain of the extremely rapid recent sell-off in credit spreads. Even the more resilient or defensive sectors have weakened significantly. The same goes for the credit spreads of the emerging market (EM) countries.
Which high yield sectors have suffered the most?
How does the recent spread sell-off compare to previous periods of stress?
Unsurprisingly, the spreads are more elevated in sectors that have seen the greatest spread widening, but this relationship is not uniform. If we compare the current worst performing sectors to the 2008 Global Financial Crisis (GFC), only airlines, energy and tobacco have spreads wider than in the GFC. In some sectors, the spreads are close, while in gaming and restaurants, the difference is still quite pronounced.
Among the best performing sectors, financials have spreads far below the GFC peak. For example, in the banking sector, the current spread of 697bps pales in comparison to the GFC peak of 2843bps. In the typical non-cyclical sectors, the spreads are still far from the GFC peak. Whether the market has correctly identified these industries as more resilient, or they see additional widening should the situation deteriorate, remains to be seen.
How has emerging market corporate credit performed?
In EM corporate credit (Figure 2), the situation is similar, although with some notable exceptions. Transport is the worst performing sector, driven again by the demise of the airlines. Metals and mining, an important sector in a number of EM countries, has also been hit particularly hard. In stark contrast to developed markets (DM), the performance of the oil and gas sector has been almost on par with the index. This is because a lot of EM energy companies are either state-owned or have the implicit backing of the state, meaning that it is unlikely that they will be allowed to default.
As is the case with the DM credit, the typical non-cyclical sectors have outperformed. For example, the spreads in the utility and infrastructure sectors have widened less than the index, while financials have also fared relatively well.
Significant dispersion among EM sovereign debt
In summary, credit spreads have widened significantly, but are not yet at historically wide levels in most sectors and countries. The areas of the market that are driven by the oil price fluctuations and the situation in the aviation industry have seen the spreads widen by more than thousand basis points. These sectors and countries now offer opportunities for high risk-tolerance investors.
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