The first quarter was a rollercoaster for global credit markets with a severe, homogeneous sell-off, followed by a sharp, if more modest, central bank-induced recovery.
This has left many parts of the market attractively valued, even when considering the huge uncertainty around Covid-19 and its economic impact.
Unprecedented support and stimulus measures from various central banks and governments have helped credit markets to stabilise and then rebound.
As the Covid-19 global death toll starts trending down and economies reopen, there is cause for cautious optimism.
However, selectivity will be vital. Q1 company earnings season highlighted the real economic damage is only beginning to filter through. Most estimates suggest default rates could rise to Global Financial Crisis-type levels.
How companies and sectors will fare in the coming months is likely to be a complex and evolving picture.
Investors can already see a significant credit spread differential between potential winners and losers, although pricing disparities between underlying fundamentals and credit spreads remain commonplace.
Attractive valuations exist and point to compelling risk-adjusted return potential, but the risk of defaults is high and uncertainty prevails.
How can credit investors navigate this backdrop? We think investors should focus their efforts on finding attractive, resilient, sustainable individual investments that will survive regardless of the range of potential outcomes.
To do so effectively they will need to pay close attention to company fundamentals, while casting a broad net across the diverse global credit market and remaining nimble as things evolve.
The broader the opportunity set, the more selective you can be.
Jeff Boswell is co-portfolio manager of the Global Total Return Credit fund at Ninety One
• Economies continue to open up and the coronavirus transmission rate continues to fall, allowing for a quicker rebound in growth and reduced level of defaults
• Central bank policy continues to remain supportive, maintaining a fully functioning credit market and providing liquidity where needed
• The Covid-19 transmission rate increases again during a second wave and growth remains under pressure as economies are restricted, leading to higher default rates
• The recession leads to an element of scarring on the economy, delaying the return to pre-crisis economic activity levels, and keeping borrowers' balance sheets under pressure